Gareth Morgan, housing, and blaming the RBNZ

Lately I’ve been saying “don’t blame the RBNZ’ for things a lot (here, here).

However, Gareth Morgan’s concern about Bank policy and the housing market IS actually a legitimate area to raise concerns about Bank policy.  His view boils down to this statement:

The problem with demand for property in New Zealand is one that has arisen as a legacy from a long history now of Reserve Bank prudential policy combining with selective tax policy to provide a toxic little no brainer for property investors.

Simply put, he feels that prudential policy overtly favours housing, thereby creating the equivalent of a “tax wedge”.

So it is NOT a criticism of monetary policy and the PTA per se – but of the institutional financial framework set up by the RBNZ, which in turn has led to some type of “inefficiency” or “misallocation of resources”.

I’m not convinced, but I’m leaving my mind open. I have had similar thoughts in the past, but have in the end ruled them out – it would just take some firm evidence to lead me to re-evaluate my priors 😉 .

Update:  As if by magic, the RBNZ has a speech up defending their framework here.  Given this speech has been booked in for some time, it isn’t a direct response.  However, I would note that they point out that risk-weighting in housing is higher here than in a number of other countries (so the capital requirement for a pool of loans on housing is higher in NZ 😉 ).

Risk-weighting are set for the capital adequacy ratio for a reason, and as a result we need to articulate why these are wrong or inappropriate.  Furthermore, it isn’t clear to me that prudential policy has had a “long history” of being pro-housing – instead it has always seemed that retail banks have been pro-housing due to the fact that they see these loans as relatively lower risk, which shows up in relative interest rates and the availability of credit.  As a result, for the argument to be made needs more analysis – the burden of proof is on the analysts making the claim that prudential policy is a “causing too much investment in housing”.  A little bit more analysis in terms of numbers and counterfactual models is in order – and if these show the result and the argument could persuade more people – including the RBNZ 🙂

Note:  His movement from excessive demand for investment in housing as an “investment vehicle” to a complaint about affordability is also tenuous at best – excessive investment demand lead to a larger stock of property (that is how we get the “misallocation of investment”) and lower rents.  The yield on property falls, and ownership becomes more expensive … but the cost of buying “housing services” actually falls.  So does this imply that Bank is making housing services more affordable?  We need to be a bit more careful not to mix up issues here!


10 replies
    • Matt Nolan
      Matt Nolan says:

      It should do – unless supply is completely inelastic. And if supply is completely inelastic, then a lift in investor demand for housing doesn’t “crowd out” other investor classes – as we have a corresponding transfer of wealth to prior home owners who can invest with it 😉

      • Deserthead
        Deserthead says:

        Must admit, haven’t thought it through yet myself, but is there a quality vs quantity aspect to housing investment that is relevant here?

        In short, could any advantages for housing investments mean “too much” investment goes into gold plating existing houses rather than building new ones?

        • Matt Nolan
          Matt Nolan says:

          Too much alteration and addition work? Sure I can see that – but that would also imply that our housing stock is of “too high a quality” … which is not something I’m sure is necessarily true.

      • PP
        PP says:

        Not if prior owners buy more of the same stuff – houses. Stock doesn’t move much, but price of stock does cos of change in debt. More leverage to own the same amount of stuff!

        • Matt Nolan
          Matt Nolan says:

          They actually have to build housing though – if they just kept “transfering ownership” it wouldn’t crowd out, as one person buying a house is giving a corresponding capital transfer to the person they are buying it off!

          And as a result, this again suggests that we need the excessive investment to take place for their to be this “misallocation of capital”.

  1. Blair
    Blair says:

    The RBNZ speech is good – it is clear they are are ahead of many of their OECD counterparts.

    The IMF Financial Stability Report on NZ has lots of interesting data but doesn’t really refute or confirm Morgan’s thesis. I wonder what he knows that we don’t…

    • Matt Nolan
      Matt Nolan says:

      Yar, the RBNZ seemed to be thinking about many of these issues before we entered the 2000s – shows why the rest of the world has such a high view of them!

      I haven’t actually gotten around to reading the IMF report yet 😛

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