Matthew Hooton: Labour won’t let property bubble keep growing


IInvestors borrowing up large to throw into residential property for risk-free, tax-free returns should be warned: it won’t be allowed to happen.

The Prime Minister may not need to worry about her hapless National opponents, based on their head-in-the-sand AGM on Saturday. But if house prices rise another 15 per cent next year, and stay on track to double again over the next seven, Jacinda Ardern’s base will scatter to the Greens or whatever populist movement replaces NZ First.

Beyond electoral politics, the two-decade-old housing crisis, during which prices have more than quadrupled, is a Les Misérables-level threat to social cohesion.

Yet if the Prime Minister listens carefully, she will hear good ideas for radical interventions, including from the most surprising quarters.

When the Government and Reserve Bank rolled out the money presses for Covid-19 back in March, everyone forgot Milton Friedman’s iron law, which I noted a month ago, that “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”.

With output certain to plunge during the pandemic, no one should have been surprised that unprecedented fiscal deficits, near-zero interest rates and the $100 billion quantitative easing programme would deliver some sort of inflation.

Nor should anyone have been surprised that the inflation manifested itself in the most highly regulated and least responsive market it could find — and one where gains are untaxed.

Assuming it is more than just another pretext for Ardern’s frowny-concerned shtick, Finance Minister Grant Robertson’s letter to Reserve Bank governor Adrian Orr asking him to consider how quantitative easing is impacting house price inflation was entirely justified — despite Orr’s terse reply.

Contrary to Orr’s curt response, the central concept of the Reserve Bank Act is not independence but transparency.

It is the minister, not the governor, who publicly sets the bank’s remit, including its economic objectives. The act even allows the minister to temporarily override the remit, as long as it is done transparently by Order in Council.

Were Robertson so inclined, he would be perfectly within his rights to require the bank to focus on stabilising the price of Krispy Kreme doughnuts, providing he did so transparently and following the correct process — and it would be Orr’s job to just get on with it.

A letter from the minister asking the governor for advice on how monetary policy might be adjusted to address a major economic problem — especially one worrying every party across Parliament — is entirely within the spirit of the law.

Orr’s huffy reply did him no credit with the Government. Worse were his subsequent public musings that he might elect to advise Robertson on everything from wellbeing and inclusion, to climate change and technological change, to regulatory reform and new taxes.

“I was very pleased that it’s an open letter,” he said, “not constraining us to narrow remits of monetary policy but saying you’ve got a highly capable team here — help provide assistance and affordability solutions. I think it would be remiss, if the letter is open, not to put our best foot forward.”

If Orr wants to move outside his core responsibilities and instead roam around on whatever policy issues he chooses, he should find a political party that will have him.

Within his actual mandate, there are plenty of ideas he could raise when responding to Robertson, like using a wider measure than the Consumer Price Index for inflation, increasing the official cash rate accordingly, reimposing loan-to-value ratios more quickly or making the bank’s Funding for Lending programme contingent on banks directing the money to more productive sectors thanhousing.

Underlying everything is whether the economy, often assumed to be on life support, might already have roared back into life, as ANZ’s Truckometer suggested in both September and October. If so, Orr’s monetary policy is much too loose.

The Government’s critics are nevertheless right — and Friedman’s eternal truth accommodates — that the source of the housing problem has been obvious right through the Clark, Key and Ardern regimes, being the inability of the market to respond quickly to rising demand.

The crisis is now too acute to think reforming the Resource Management Act and building code is enough.

As a start, Ardern should immediately implement her promise, confirmed in no less than that the 2017 Speech from the Throne, to abolish the Auckland Rural Urban Boundary.

Had she done so in 2017, it wouldn’t cost nearly a million dollars to buy an ex-state house in South Auckland.

Robertson’s letter suggests he has listened to former Finance Minister Michael Cullen’s orthodox economic concerns, raised two weeks ago, about the effect of monetary policy on house prices.

Robertson might also be surprised if he has a chat with another legendary Labour Finance Minister, Sir Roger Douglas.

The doyen of the free-market right, Douglas has no hesitation in declaring the over-regulated housing market has completely failed. He describes Helen Clark and John Key’s inaction as disgraceful.

So great is the current crisis, Douglas argues for the type of bold intervention he is usually associated with opposing.

He says the Government should immediately commit to an annual rezoning of land to ensure supply meets demand. Enough land should immediately be rezoned to makeup for the failure to do so over the last 20 years.

Land bankers should be required to develop their properties within a reasonable time, or face punitive rates to force them to sell to someone who will.

Such measures would immediately dampen inflationary expectations and cool the market but Douglas goes further, saying the Government should immediately launch a shared ownership scheme, under which it would help young couples who could finance, say, 60-90 per cent of a house by taking the remaining 10-40 per cent stake in the property. The couple could then buy out the state’s share when they could afford it.

When even Douglas has advice like this for Ardern and Robertson — should they want to receive it — those wanting to throw everything they can borrow at residential property ought to be just a little careful.

– Matthew Hooton is an Auckland-based PR consultant. These views are his own.

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