Economist Rodney Dickens reckons nothing good will result from the Reserve Bank’s lending restrictions that come into force today.
Having played a major part in fuelling the speculative bubble in the housing market in the 2000s with low interest rates, the Reserve Bank’s latest actions are partly driven by a desire not to repeat the same mistake. Rather than resort to the tried-and-true remedy of hikes in the Official Cash Rate (OCR), Governor Wheeler, like his predecessors, wants to try a new experiment, with bank lending restrictions being the new toy this time around. In the ideal world the lending restrictions will cool house price inflation without hurting other sectors of the economy unduly, including resulting in a lower exchange rate than would be the case if OCR hikes were used to cool the housing market.
Cooling house price inflation isn’t a straight forward issue because the latest surge in the national average house price is being driven by much more than just cheap money. Surging net migration is boosting housing demand, but this shouldn’t be a major obstacle to the Reserve Bank cooling house price inflation. Of more importance are the past actions of councils and governments that drove up new housing costs and severely curtailed the level of residential building, especially in Auckland.
The government’s housing initiatives are supposed to solve the housing affordability problem and boost residential building. But they are likely to be slow to impact and probably won’t go far enough. In the interim the Reserve Bank is left with the dubious task of using Prudential Policy (i.e. policy focused on maintaining the soundness-of-the-banking-sector) to solve a problem that goes way, way beyond banks offering low deposit mortgages.
My greatest concern is that the bank lending restrictions are discriminatory and divisive. Policies that are seen as being unjust, like the bank lending restrictions, are doomed. My hope is that Governor Wheeler will wake up to this earlier rather than later, but history suggests new governors like new experiments and can take some time to dump the new toys in favour of tried-and-true remedies.
Read Rodney’s full Raving on this here: “Nothing good will result from the Reserve Bank’s lending restrictions” [PDF]