Liam Dann: Strong house prices look like RBNZ's primary economic lever

New housing boom? Photo / Mark Mitchell

COMMENT:

Like it or not, a strong housing market could be the thing that keeps New Zealand's economy afloat over the next year.

Plenty of New Zealanders won't like it - especially the younger ones.

Concerns are already growing about record low interest rates causing a new surge in house prices, further widening the wealth gap between those in the market and those locked out.

The Reserve Bank monetary policy committee yesterday acknowledged the reality that "a stronger housing market may indicate a stronger recovery in consumer spending and residential construction if sustained".

It also sent the market its strongest signal yet that it is ready to deploy more tools to push interest rates lower still.

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While it kept the official cash rate on hold at 0.25 per cent, it continued talk of using negative interest rates and Funding for Lending (FLP) as tools to keep policy stimulatory "for a prolonged period".

Most bank economists now expect to see the official cash rate cut into negative territory by April.

But the RBNZ said FLP - which is a form of cheap direct lending to banks - could be ready to deploy as soon as November.

Westpac chief economist Dominick Stephens described it as "as strong a hint as the Monetary Policy Committee could possibly give" that more stimulus was on its way.

Meanwhile, the Reserve Bank monetary policy committee yesterday acknowledged that house prices had risen over recent months, in contrast to its original baseline scenario which had assumed a decline.

Some members also noted that economic activity in New Zealand had "historically been closely correlated with changes in household wealth, and that a stronger housing market may indicate a stronger recovery in consumer spending and residential construction if sustained."

Other members offered a more pessimistic note, "that low population growth and rising unemployment are expected to constrain further house price increases".

Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell

While the verdict is still out on whether this surprising strength of the housing market is sustainable, it is hard to argue with the notion that it is helping to maintain economic confidence and prop up spending.

It is also hard to argue with those who say leaning on house prices to prop up the economy - again - is unfair.

The issue, unfortunately, is that New Zealanders' reliance on property as a primary investment - and a highly leveraged one at that - means a hard correction right now would likely do even more damage - deepening the recession and causing even higher unemployment.

Reserve Bank Governor Adrian Orr argued to this effect in a recent speech.

Monetary policy has to stay focused on its primary goals of stable inflation and employment, he says, with the onus on fiscal policy to address social inequalities.

It seems that if monetary policy continues to do its job as well as it has in this crisis, then even more acid will go on the Government to get on top of a housing inequality issue that isn't going anywhere fast.