Why house prices are likely to rise post-election

Post-election, what will cause the next round of house price rises in New Zealand? The answer is the behaviour of the Reserve Bank.

That’s a strong statement, but it’s a view I can’t draw myself away from.

How can we possibly blame the poor old RB? Surely it depends on the outcome of the election. Political parties are firmly focused on the housing supply problem and affordability. They’ll open up zoning, make changes to the resource management act and hopefully find a way of paying for infrastructure costs in new subdivisions, instead of piling these into land prices.

Working directly against politicians in the quest for more affordable housing is the Reserve Bank.

They’re about to implement a new way of giving banks money to lend out. It’s called the “Funding for Lending Programme” and we’ll hear more about it in November. A more accurate title might be the “Fuel for House Prices Programme”, because that’s going to be the outcome; higher prices and less affordable housing.

How does it work?

Very simply, the central bank pushes a button, generates some new electronic money and loans it to the major banks at super-low interest rates. Possibly even negative interest rates. Banks add their margin and pass on lower costs to us.

Why do it?

To stimulate the economy due to floundering growth from the pandemic and to get businesses and homeowners spending more. We’ll all have more money in our back pockets.

Why do interest rates need to be negative?

Rates are currently stuck and can’t fall much further due to the zero per cent barrier on deposits. The odd contestant on The Chase takes negative prize money to stay in the game, but it wears thin pretty fast. Kiwi ingenuity would soon see us holding savings in vaults or holes in the veggie garden.

Banks make a margin of roughly two per cent on loans. Adding this to a negative interest rate allows loans to be issued at rates below the two per cent barrier.

Why is that bad?

More money in the pockets of people and businesses isn’t a bad thing. But it’s bad for property prices. When loan repayments fall, we start offering more for houses. Sellers start asking for a little more, knowing buyers can afford it. With a continuing supply problem, a competitive market keeps rising. As evidence, the Reserve Bank has previously estimated interest rates falling two per cent caused a rise of 50 per cent in house prices, in the last decade.

Are we stuck between a brick and hard place?

Some would argue this is the price we pay to stimulate growth and business confidence in the Covid economy. Interest rates must drop further.

On the flipside, the blindingly obvious solution is to carve out residential property lending from the Reserve Bank’s programme and direct it firmly towards providing much cheaper business loans. Companies with lower costs will grow and employ.

Or we allow banks to ring-fence and include their distressed mortgages in the programme. This would help homeowners in financial hardship, by bringing down the cost of mortgage holidays and allow more time to find employment.

Why has all lending been included?

It was argued that the Reserve Bank programme needed to be simple or banks won’t use it. Seriously? What do banks plan on telling shareholders? We couldn’t be bothered taking the cheap money and growing our commercial book?

There is nothing complex about having a residential property carve-out. The Bank of England did this in 2014 after discovering their own stimulus programme was fuelling house prices.

The doves are circling

The Reserve Bank seems blind to house price risks. They appear to believe increases in the last three months are a bit of froth that will disappear, due to impending mortgage distress from job losses. It all makes sense in theory, but houses are not shares, where the last traded price becomes the value for all. Property is a collective of distinct individuals operating within their own regions, circumstances and emotions. Partial distress within a small sector of the market doesn’t dictate the next sale price.

Can the politicians do anything?

The only way politicians can stop the inevitable asset price creep is to prevent banks using the Reserve Bank’s cheap money to lend to homeowners or landlords with residential property. If they’re asleep at the wheel we’ll be mopping up the social consequences of falling affordability with more taxpayer money.

Janine Starks is the author of www.MoneyTips.nz and a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances. MoneyTips.nz@gmail.com