Kiwibank's chief economist says the Reserve Bank inflated house prices on purpose in their efforts to boost the post-pandemic economy - but the Covid-19 recession has put New Zealand in an unusual position.
Jarrod Kerr's explanation of the impact of the Reserve Bank of New Zealand's (RBNZ) Covid-19 measures comes as Finance Minister Grant Robertson defends his letter to the central bank asking it to consider house prices as part of its mandate.
Kerr told Morning Report: "I think that what we are seeing is a reaction to what we didn't expect. We've seen a central bank and a government do everything they can to address a Covid pandemic and then also at the recovery and we have found ourselves in a highly unusual position where the economy has gone through a really severe recession and house prices have taken off.
"So the potency of monetary policy is still there, it's still alive, and what the central bank has done is inflated house prices. And they would argue that is much better than house prices falling."
Robertson rejects letter was 'political theatre'
Kerr said the step of the Government telling the "fiercely independent" RBNZ what to do - which Robertson rejects he was doing - was dangerous.
Robertson told Morning Report his letter was "designed to make sure that the Reserve Bank is aware of the Government's view that the economic objectives that are part of the remit that we agreed with them in 2019 include ensuring that reduce inequality and produce more in a sector that's going forward.
"We are concerned that rapidly escalating house prices are putting that objective at some risk. So we are asking the Reserve Bank to consider what it can do to support the Government in the overall object of sustained moderation of house prices.
"The final decision about what they do still remains theirs under our independent monetary policy.
"What we have done is do what is covered for under the Reserve Bank Act, which is for me to seek the advice of the Reserve Bank governor on potential change to the monetary policy remit so they have to give some consideration to house prices as part of the work they do when setting monetary policy."
While it was important that the Reserve Bank made decisions on its own, it was the Government's job to make sure the RBNZ understood its objectives, Robertson said.
The issue was not the RBNZ's alone, but a collective responsibility for the Government also, he said.
Robertson rejected any suggestions that asking the RBNZ to focus on housing might mean less attention on unemployment, which would then go up.
"I was very clear yesterday that we are not altering the primary objectives of the Reserve Bank."
The letter Robertson received back from RBNZ governor Adrian Orr said the bank already took housing into consideration.
Asked if that meant his letter in the first place was "political theatre", Robertson said "no".
"It does come back to the fact that everybody has a part to play here," he said.
"The point of the letter is to say to the Reserve Bank 'what else do you think you need in your toolbox, what other ideas do you have for the way you operate monetary and financial policy?'."
The government would consider debt to income ratios if put forward by the RBNZ, he said.
Debt to income ratios limit how much people can borrow.
"Ultimately, it again remains the decision of the Reserve Bank as to whether it would go through with that."
Kerr said debt to income ratios had "more of an impact on first home buyers and make it harder to get onto the ladder, so to speak. And again, that falls under the financial stability part of the Reserve Bank".
Introducing a 40 per cent loan to value ratio for investors would "take the steam out of the market" as it had in the past.
But he said the supply of housing had to be increased.
When it came to housing, there was a demand issue, he said.
"There's nothing wrong with that. People want a home, it's a good investment. The problem in this country is a lack of affordable supply. I think the Government can play a larger role in the supply of affordable dwellings in this country.
Robertson rejected that the situation was about "shifting blame" after Labour restricted its options by ruling out a capital gains tax or a wealth tax.
"We all have a responsibility here, and there's plenty of policy space outside of the things that we have ruled out, to support affordable housing."
The Government would look at how the bright-line test was working and whether it need to be extended past five years.
The bright-line test means if you sell a residential property you have owned for less than five years you may have to pay income tax.
Collins still focused on RMA
National Party leader Judith Collins said asking the Reserve Bank to consider what more could be done to rein in skyrocketing house prices could make a difference.
"I think what it does do, it tends to indicate the direction of travel for the banks. So if you look at the loan-to-value ratio that is something where banks are already taking that up with some saying they want a 30 percent deposit rather than 20 or 10 per cent."
But none of this would build new houses, she said.
"The big focus has to be on getting new houses built and that's why we've been constantly talking about the Resource Management Act and its reform that's urgently needed.
"I would say to the Government, reach out across the aisle, let's make this lasting and bipartisan."
Collins said she would not support an extension of the bright-line test.
Taking it to five years from two years had made no difference and any extension would be no help in getting people into houses, she said.
"It also stops investors bothering to buy houses to put tenants in."