'Housing is not a free lunch' Reserve Bank warns investors amid continued stimulus

Reserve Bank Governor Adrian Orr is signalling monetary stimulus won’t end any time soon amid a red-hot property market and a world still grappling with Covid-19.

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Adrian Orr says monetary policy can influence demand for houses, but the Government needed to do its bit too to stop prices skyrocketing. Source: Breakfast

But, it comes with a warning to investors. 

“Housing is not a free lunch. It’s just another investment asset and it won’t always be your best investment asset. Think hard around the uncertainties and risks you are taking on thinking that more and more houses is a good idea,” Orr told Breakfast this morning.

“It’s the hot money of investors that really creates these speculative spikes … because they can come in and out of the market quickly.”

It comes as the Reserve Bank announced yesterday, as expected, it was holding the official cash rate (OCR) at a record low 0.25 per cent.

The OCR is what effectively sets the interests rates people pay when taking out a loan, or receive from savings in the bank. A lower OCR, therefore, can stimulate borrowing and spending. 

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Reserve Bank holds OCR at record low 0.25%

Orr said monetary stimulus was still needed to encourage spending and investment because confidence remained low. He said this was because while Government (fiscal) stimulus continued, it could begin to “taper off”. 

Central banks had also learnt their lesson from the Global Financial Crisis (GFC), he added.

“Central banks tried to remove the stimulus. They stepped in [during the GFC], they did their mahi, and then they tried to exit too soon. And you saw global economies fall flat again.”

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Interest rates won’t be going anywhere anytime soon, but today’s decision comes with a big warning. Source: 1 NEWS

While New Zealand’s “world class” Covid-19 response meant the local economy fared better than expected, the same couldn’t be said overseas, Orr said.

“As long as borders remain closed, as long as businesses remain concerned and unwilling to invest globally, then our economic fortunes are forever linked to that,” he said.

“We need the rest of the world to come and join us, and we will keep the stimulatory conditions until we see that happen.”

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1 NEWS can tonight reveal what we've all suspected, the regions that have had the highest number of houses built in the last decade have had the slowest price growth. Source: 1 NEWS

But with continued stimulus means continued investment in what Orr called New Zealand’s favourite asset - houses. 

A Core Logic report released yesterday found house price to income ratios across the country had peaked at its highest level since 2004. Findings revealed it would take someone about nine years to save for a deposit. The report also noted that while the fall in interest rates had helped with mortgage affordability, the sharp rise in property values dampened the effect. 

But Orr said the central bank wasn’t solely responsible for the state of the housing market. 

“We will do our best. When it comes to employment and inflation, without doubt, we are very important in being able to influence aggregate demand.”

But, “many factors” were behind the rise in house prices, namely the lack of supply, Orr said. While the Reserve Bank had “tools” to control demand, it needed the Government to tackle the issue more broadly. 

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Robertson writes to Reserve Bank over soaring house prices, wants to give first home buyers 'a shot'

Last year, Finance Minister Grant Robertson and Orr exchanged letters over the housing crisis. Robertson urged the Reserve Bank to think about how it could moderate house prices, which could mean the central bank could factor in house prices when it made monetary policy. 

Orr replied to the letter, saying the central bank’s monetary policy had limited influence, compared to the wider-ranging policies the Government could take to address supply and demand.

Without stimulus from the central bank, unemployment would rise and deflation could occur, which was “just a disaster”, he said. 

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Orr said the Reserve Bank already “started doing our bit”, such as by re-introducing loan-to-value ratio restrictions from next month.