Finance Minister Grant Robertson has called on an important ally in the Government's attempts to tame New Zealand's wild housing market.
Robertson has publicly lobbied Reserve Bank Governor Adrian Orr to do more to cool New Zealand's red-hot housing market.
It comes at a time when house prices have grown 20 per cent in the space of a year, while the rest of the economy grapples with a recession.
"The New Zealand economy is doing a lot better than expected and one of the ironies is of the back of recession we have a housing boom, now not many economist would have been told that that was likely."
Robertson said there was an increasing level of confidence in the business community in the shadow of Covid-19.
"This is just about what the bank can do, it's also about what we can do."
LISTEN LIVE ON NEWSTALK ZB: 705 Finance Minister Grant Robertson; 735 Local Govt Minister Nanaia Mahuta; 805 Tourism Minister Stuart Nash and National's Mark Mitchell
Robertson told Newstalk ZB's Mike Hosking that the Reserve Bank has an agreement that sets the high-level goals for monetary policy and that is the appropriate place to be in.
"Some other political parties have been suggesting that we direct the Reserve Bank around their operational programme, i.e saying this monetary policy should be run this particular way. That would be going too far," the Finance Minister said.
"I think we are in exactly the right place in terms of the conversation we need to have.
"I'm not suggesting they [the Reserve Bank] have done anything wrong at the moment."
During April and May the Reserve Bank stepped up a lot, he said.
"They provided cash flow and confidence.
"The thing is, Mike, economists said house prices were going to plunge but the opposite has occurred so it means that all of us need to take a moment to have a rethink," Robertson said.
"We need to get a period of sustained moderation with those house prices.
"It's not a matter of the Reserve Bank having done anything wrong, it's simply a matter of we live in the shadow of a one-in-100-year event that is moving very fast."
In response to a question about the funding for lending programme being a problem, Robertson said it was about being clearer about the matters the Government wants the Reserve Bank to be considering.
"They already have a number of matters in the agreement that they need to consider - the founders of the financial system, the stability of exchange rates, interest rates and output in the economy. Adding house prices to that would be one way of ensuring that those matters are considered when monetary policy is set.
"What the Government's job is to do, is to make clear what our ultimate goals are for monetary policy and what we want the bank to be considering.
"We are actually also genuinely asking them what they can do in terms of monetary policy to support the Government in our economic goals," Robertson said.
"I don't think anyone out there would think that a 19 per cent increase in house prices in a couple of months is a good thing.
"A sustained increase in house prices at that level is something no New Zealander wants in terms of thinking about your children and grandchildren trying to buy a house.
"Houses are good assets for New Zealanders and therefore sustained moderation - and there will be ups and downs in the market but that they remain a good investment is what I'm looking for.
"I'm not going to put a number on it but I think when you get up to the 15 to 20 per cent year-on-year inflation it is challenging for everybody."
The move, Robertson hopes, would help bring about a period of "sustained moderation" to New Zealand's housing market.
In the meantime, he has revealed the Government is looking into a number of demand-side measures, such as extending the bright-line test, which would help relieve pressure.
Today, he publicly released a letter he had sent to Orr, asking him to expand the Reserve Bank's mandate to cover house price stability.
The move has been welcomed by the Opposition, with both Act and National saying the letter was a good idea – although they both claimed credit for the initiative.
But, one economist was less convinced.
"The letter from the Finance Minister seems to be a knee jerk response to soaring house prices and appears as a way to shift the blame and appear proactive on the housing front," says Infometrics Senior Economist Brad Olsen.
In his letter to Orr, Robertson said he was "concerned that the recent rapid escalation in house prices, and forecasts for this to continue, are affecting the Government's ability to meet the economic objectives set out in the Remit".
In a separate press release, he said that given the extended period of low-interest rates, "now is the time to consider how the Reserve Bank may contribute to a stable housing market".
At the moment, the Reserve Bank's mandate includes controlling inflation, supporting sustainable employment and ensuing financial stability – nothing specifically about house prices.
After Covid-19 started significantly impacting New Zealand's economy, the Reserve Bank slashed the official cash rate (OCR) and flooded the market with tens of billions of dollars' worth of bond buying – essentially printing money.
The Reserve Bank said this has helped stimulate the economy – but economists have argued that it's pushed house prices up.
Despite this, Robertson said he was not blaming the Reserve Bank for the rapid house price inflation and said the central bank has served New Zealanders "incredibly well".
As for what happens now, the ball is in Orr's court.
That's because the Reserve Bank is deliberately independent from the Government.
Robertson can make suggestions, but it's ultimately up to Orr if he adopts them.
In his own letter in response, Orr said the bank was now considering Robertson's letter and would be "engaging constructively and responding in due course".
But he assured Robertson that when the bank makes its decisions, it "gives consideration to the potential impact of monetary policy on asset prices, including house prices".
"Housing market-related prices are also included in the Consumer Price Index, for example rents, rates, construction costs, and housing transaction costs."
Meanwhile, Robertson said he has sought advice from the Treasury about demand-side levers the Government can pull to help tame the housing market.
This includes initiatives such as the bright-line test and the ring-fencing of rental losses – Robertson would be looking to possibly expanding these policies.
But Olsen said this doesn't show the Government is very serious about addressing house prices and was, in fact, "abdicating responsibility for issues in the housing market to others".
Independent economist Cameron Bagrie said the Reserve Bank needs to have debt-to-income limiting tools, which would work to dampen house price demand.
Although the Government has ruled out any further tax increases to cool the housing market, the Greens say the tax lever needs to be pulled if the Government wants to make meaningful changes to the housing market.