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OCR hike not needed, penalises rest of NZ for Auckland house pricing - Nana

Thursday's OCR hike was not needed, and penalises the rest of NZ for Auckland house pricing says BERL chief economist Ganesh Nana.

"We may be growing but we’re coming out of very deep recession, the rest of the world is still on its knees, we should be encouraging that growth even further rather than looking for phantom ghosts. [With inflation at] 1.6%, well within the band, and what we are experiencing, many parts of the New Zealand economy are actually experiencing deflation," Dr Nana told TV3's The Nation.

The Reserve Bank has signalled a 2% rise over the next two years, the economist said, characterising it as "quite a steep increase."

"The risks are that we put pressure underneath our exchange rate even more that increases our exchange rates, that makes imports cheaper so we’re rewarding consumers and that makes exporting a lot harder so we are penalizing those that are trying to actually earn us an income."

Dr Nana said interest rates were a "very blunt tool ... We’re supposed to be focusing on economy wide inflation…not just house prices, and not just house prices in Auckland. And actually the worrying thing, or the frustrating thing from my perspective is that we’ve been through this so many times before and yet that we still haven’t learnt as a country that we can’t control house prices through the blunt instrument of monetary policy. And that seems bizarre that we are penalising large proportions of the New Zealand economy and population because of problems in particular sectors or particular regions."


RAW DATA: Transcript

The Nation's Simon Shepherd interviews BERL chief economist Ganesh Nana, Real Estate Institute CEO Helen O’Sullivan, Co-operative Bank CEO Bruce McLachlan

Simon Shepherd: The Government has said that the bank is seeking to ensure its economic expansion can be sustained, Ganesh, that sounds quite sensible?

Ganesh (GN): it sounds quite sensible and that’s the model that we have been working with for the last 20 years, it hasn’t been that successful, but its playing by the rules that are in front of him and there is a perception out there that the economy is growing very strong and this means we need to increase our interest rates because of this phantom inflationary rate pressures.

Phantom, so you’re not really buying into that, you’re saying that its not that successful and that inflation is only about 1.6% and so its well within the target band and so its not needed yet?

GN: Exactly, yes we may be growing but we’re coming out of very deep recession, the rest of the world is still on its knees, we should be encouraging that growth even further rather than looking for phantom ghosts. As you say, inflation 1.6, well within the band, and what we are experiencing, many parts of the New Zealand economy are actually experiencing deflation, I'm not convinced.

So going ahead with this means, what are the risks?

GN: The risks are that we put pressure underneath our exchange rate even more that increases our exchange rates, that makes imports cheaper so we’re rewarding consumers and that makes exporting a lot harder so we are penalizing those that are trying to actually earn us an income.

Right, Bruce McLachlan as CEO of a bank, you are the person that passes on these rate rises. Do you think it’s necessary?

Bruce McLachlan (BM): Well the first thing I’d say is that I think that the reserve bank has an incredibly difficult job, because they’re not really trying to solve inflation issues for today, they’re trying to predict what they will be in 12 or 18 months time, so I think in the first instance, none of us are dealing with perfect information

But do we need them right now? I mean Ganesh is saying that its too early, that it’s a phantom target

I think the second thing is, it’s been the most signalled increase that I can ever recall, and so this rate increase is not a surprise to anyone, the market as a whole has largely agreed that we have to get into an interest rate cycle…increase at some stage, the current evidence would suggest that the economy had certainly been improving, and is quite strong and so we have to get onto that cycle at some stage

Do we actually have to get onto that cycle at some stage because it’s going to float through into house prices the meat and potatoes of everybody’s conversation? Do we really need this ?

Helen O’ Sullivan (HO): I guess, well Bruce’s point that it’s been well heralded, I think is a good one, I guess the thing that we are seeing at the moment is that the housing market is actually, in terms of the rate- the growth of sales is definitely slowing down. Probably, is this going to have an impact on the confidence of builders to come into the market and actually bring more stock into the market, which is probably the thing that we most need, to reduce house price pressure in the market.

Okay if we just look at it as a blunt tool for housing, we’ve got good price rises in Auckland and Christchurch…flat around the rest of the country- so the rest of the country is being punished for something that is happening in Auckland and Christchurch

(HO): That’s always a tricky one, I mean the reality is the reserve bank cant set a differential interest rate for Auckland and Christchurch compared to the rest of the country, now that I think is unavoidable. But it is true that we are certainly seeing a lot more price pressure in Auckland and Christchurch than we are seeing in the rest of the country, essentially outside of those two centres where you have real supply pressures, prices are actually relatively flat. And we’re seeing the volumes come off in those regional areas much more than in Auckland and Christchurch

Okay, so Ganesh we have flat house prices or volumes coming off in the regions, they’re going to have another hike there, it’s just going to hurt the regions even more, maybe job losses there?

(GN): Exactly and I think that reinforces the point,  that we got we got a very blunt tool around interest rates, trying to do a lot of things and we’ve got to focus on interest rates or monetary policy, we’re supposed to be focusing on economy wide inflation…not just house prices, and not just house prices in Auckland. And actually the worrying thing, or the frustrating thing from my perspective is that we’ve been through this so many times before and yet that we still haven’t learnt as a country that we can’t control house prices through the blunt instrument of monetary policy. And that seems bizarre that we are penalizing large proportions of the New Zealand economy and population because of problems in particular sectors or particular regions.

Okay,  this is going to be a very, ah, I mean we’ve already got home-buyers being left on the sidelines through the LVR restrictions put in by the reserve bank, now we’re going to have interest rate hikes, Bruce  this going to be a killer for first time buyers isn’t it?

(BM): Um, well look, can I just go back to the previous point, because I don’t see that this interest rate rise was just about house pricing…. clearly it’s in response to the kind of broader issues that the reserve bank are seeing, potentially growing in terms of capacity constraints across multiple sectors, so…and I think…I look at this quite simplistically, if you go back to when the reserve bank took the interest rates down to the current level, which was back in 2008 and 2009 the world was in crisis a financial sector, we didn’t know if it was going to survive globally, we didn’t know what was going to happen, it was a totally different environment, we’re in a much, much more positive environment now.

This is good news, are you saying this is indicating good news?

Well it is, but I think that it’s becomes very difficult for us to say that we should keep interest rates where they were, when they were set in a crisis environment

Nobody else around the world is raising interest rates, and we need more growth, we need that stimulus for more jobs for more growth don’t we, we haven’t really got there yet?

No, well look the thing is, I think that we want to get on a sustainable track. What we don’t want to do want to do is be kind of fluctuating from boom, bust, boom, bust. That’s not what we want…a far more steady and sustainable pattern is in all of our interest I believe.

Okay lets just go back to the first home buyers issue, they are the people who perhaps are going to feel the pain of this aren’t they Helen?

(HO): I think all buyers are going to feel the impact of this to be fair, because looking at the reserves banks data around, the shape of the residential mortgage book, there is an enormous amount of that which is still, which is on fixed or floating or fixed for less than a year.

So those mortgages are going to come off, and its going to flow through quickly to people’s hip pockets? Is that what you’re saying?

(HO): Yes and I think that will have an impact on how far up the reserve bank has to go, You know I think, as Bruce says we are sitting in a position at the moment where, these rates were set at a crisis rate…certainly things have moved well up from there, and I guess the reserve bank is looking 18 months out as opposed to just right now

Now Ganesh in terms of consumer spending we are going to see this rate hype float through relatively quickly, because people are on floating or short-term fixed

(GN): Yes and we will have again though, a very regional impact because, I take issue with Bruce’s point around that we are now better than we were at the crisis point, maybe in New Zealand, and maybe in some sectors but that is definitely not across the board. And we’ve still got parts of Europe and indeed IMF suggesting that Europe might even be considering negative deposit rates, how anybody can suggest that we are past the crisis, when we’re facing that I don’t know and that’s the concern. We are growing yes, we may be having some capacity pressures in some sectors…but I really don’t see why then that should signal and say well, we’ve actually got to stop growing, or slow down growing…Which sectors are we suggesting that we should slow down? That’s my concerns

Bruce, what do you say…that this is just across the board that we’re doing well and so it’s okay to have the sustainable increase? 

(BM): Please understand that I am not the Reserve Bank Governor, I don’t think that that career option is open to me. But look, I just look at it…you cant take what is a very macroeconomic tool and try and debate it at a microeconomic level because you could always come up with any number of stories, to say well you should or you shouldn’t do it…As I say, I stand back as the overall level of interest rate is now consistent with the economy and what we see today and what we expect it to be over the next year and in my view, its still too stimulatory for what the forward view is, and so a sustainable move up…a well telegraphed move up which enables borrowers to hedge their position is a good path for us to follow…

Do you see that as going to have an immediate impact on say, slowing down wage inflation and cutting jobs?

(BM): My personal view, a quarter of a percent in interest rates does virtually nothing.

(GN) Sorry, can I just jump in? It’s not a quarter of a point, I mean the reserved bank has signalled 200 basis points, that 2 percentage points over the next two years now that’s a quite steep increase…

So Ganesh and that’s going to have an impact on say, wage inflation? It’s going to bring wages down? Or slow the increase?

(GN): Well it’s not going to have a great impact on wage inflation because there isn’t any wage inflation, what it will have an impact on is as businesses plans about investing, investing in new equipment and machinery or in jobs and new markets, that’s what we’re cutting off at the knees, so you’re right, it won’t have an impact now or maybe even the next six months, but it will definitely slow us down over the next two years and beyond because we have this fixation that if we even look like growing a little bit too fast, we’ve got to stop when we actually should be encouraging us to grow the pie let’s make it bigger.

 

Comments and questions
28

Dr Nana, is correct. This is not even economics 101 its just plain common sense and it appears Dr Wheeler can be led by the bank economists as they need a rate rise for the bonus pool in the profit margin. Or am I just being cynical?

You are not being cynical. You are right on the money. The RB has lost the plot.

Is this coming from the same economist who designed the Labour/Greens Power policy on the back of a cigarette packet?

It is all very well when well paid people criticize the Reserve Bank for putting up interest rates but do these same people have an alternative to the massive house price inflation occurring in Auckland?
Just building more houses for investors will not work!!
There will be major social problems in a few years when young people realize that they have been denied the ability to ever be able to afford a house.
I would rather see interest rates go up than house price inflation continuing at over 10% per annum.

I think Auckland house prices and volumes have fallen since November ut are hidden in the stats as they use an annual figure. if this is true, further increases will be deferred.

I dont think the rate rise was need but he felt he had to as had been threatening for so long. I dont expect the rates to go up 2% in 2 years are forecast. On am betting on this with my floating mortgage.

Volume of sales have dropped (less stock), prices haven't. Big distinction.

1. Use the ole RAR to target Auckland housing loans.

2. Government and local authorities rezone 'rural' land for housing - plenty around fringe Auckland waiting to be released onto the market. Karaka and Papakura way, tens of thousands of sections can be released from land currently used for a few ponies and horses running around.

That's the alternative.

Sure, and increase the challenge that is the southern motorway for people driving to work in the morning. The solution to housing is to go upwards in the inner suburbs.

3. Stop foreign ownership. Aucklands massive increases are being driven by Chinese money.

I agree, but instead of stopping foreign ownership, just levy a "Citizen equalisation stamp fee" of 50% on the purchase price on any non-citizen who purchase real property in the greater Auckland Area. That should raise some revenue for Auckland's infrastructure and discourage non citizens from speculating.

The answer to controlling house prices is for banks to go back to lending 2.5 times annual salary. That's all I could borrow in the 1980s and 1990s.
It's the banks lending the money that's allowing prices to rise.

The difference is that back then you could buy a house for that much. Now you can't.

You are correct, and it's because the banks lent too much, allowing people to borrow more, and that raised house prices.
Now, an average home is 8X annual salary. The banks are the problem.

Sorry Steve, what's driving prices right now is foreign 'investors' who have access to more cash than you can dream of.

Definitely agree there.borrowing such huge amounts of money is not a good thing.better to borrow less but at a higher rate it equivalents to the same amount

It seems it is for the banks, who by the way, are now regularly meeting behind closed doors with Reserve Bank officials. Just don't mention the conspiracy, insider trading or cartel.

As such, watch how deposit rate rises lag terribly behind borrowing rate rises ... dyodd.

My thoughts echo Nana's. However the pressure was ongoing from various "expert" economists.

There is still significant underlying fragility in the economy - particularly in lower South Island.

strong dollar is good for a lot of people in NZ. Makes even domestically produced export products cheaper in local market. Dollar decline is a pay cut for many. Low dollar good news for exporter with debt. Would be interested to know of economy that has high living standard with very low exchange rate.

I noticed that the banks have flagged higher interest rates on loans, yet we have not heard a thing about higher interest rates on deposits. Strange that!!

Agreed. The banks instantly put up mortgage interest rates. Yet there was not a peep from any bank or the RBNZ about deposit interest rates. The silence is deafening.

Not one person I have spoken with during the past few months is comfortable with their firm's turnover. It's wobbly where ever one looks. These business confidence surveys are rubbish. I reckon only those doing well respond to them, the rest of us are too darned busy to complete them.

How interesting. So tell me do, given that your suggestion that only those doing well respond to the survey is pure rubbish, are those who are surveyed telling lies, or are the statisticians who collect the data furnishing false reports?

Ring fence tax losses from residential property investments. Make a limit of $10000 per year rental loss offset against other income. Then the ridiculously high geared Auckland property investors will loss the(tax) incentive to invest in that market. Taking that factor out of the housing market will, like the LVR, have a major dampening effect on Auckland residential property markets.

Ganesh Nana is 100% correct. The rest of NZ is economically stagnating while Auckland apparently zooms ahead. A prospering Auckland is essential for NZ but too much of the inflationery pressure is from House prices up there. Christchurch is in a unique situation but as for small to medium town NZ - it's pretty sick just now

Disallowing losses means taxing turnover rather than profit. Problem with that is, how do you get tax out of someone who hasn't got any money, because he/she hasn't made any?

Penalizing those with variable rate mortgages - they bear the burden of the monetarist solution. Get onto a fixed rate, or retire the mortgage, and you are no longer paying the short-term cost of inflation management.

Dr Nana forgets that almost all of NZ is experiencing house price inflation to some extent, it is a major structural flaw in the NZ economy. By hiking early and little there will be a helpful attitude change.

Tall poppy syndrome.
NZ is the only global tall poppy? [ Rock star economy ?]
Does that make sense........

Surprised that none of the commentators, or the Reserve Bank Governor, has talked about the value of a capital gains tax for controlling the rise in Auckland house prices. Ganesh is absolutely correct: raising the OCR is ridiculous. If Ganesh would provide us with a graph of OCR versus inflation over the last 30 years or so I think his point would be made clear for all to all.