In a speech to the Rotorua Chamber of Commerce, Reserve Bank Deputy Governor Grant Spencer urged greater attention be given to reducing housing market imbalances that are presenting an increasing risk to financial and economic stability.
In particular he said that: “Irrespective of the mix of demand and supply-based factors, the longer the excess demand persists, the further prices will depart from their underlying fundamental determinants, and the greater the potential for a disruptive correction.”
Click here to read a copy of the speech.
The Reserve Bank confirmed that policies to ease the supply constraints must be the main priority, but that they are unlikely to yield quick results. There is significant scope to ease the consenting process to make it easier to bring more housing stock to the market.
However, on the demand side, the Reserve Bank is restricted in being able to use the OCR as a tool to dampen demand both because the housing market is only really strong in certain areas (Auckland and Christchurch) and also because the CPI is also below the target range, which will be worsened by increasing the OCR.
The Deputy Governor said that the Reserve Bank would like to see fresh consideration of possible policy measures to address the tax-preferred status of housing, especially housing investment. In the past this has been ruled out by the Government. However, the imbalance in tax treatment for investment houses compared to other investments creates a significant incentive to invest in residential housing.
While there is no quick fix to the housing crisis, it almost seems inevitable that changes are needed to the policy settings for investment policies. However, it does not look like any changes are likely in the foreseeable future.