Arthur Grimes on the housing catastrophe

Arthur Grimes writes:

Compounding this extraordinary situation is the collapse in migration. Since the pandemic, from April 2020, net immigration has averaged just 495 people a month – one tenth of the pre-pandemic rate. We have built large numbers of houses and apartments and yet we have few people arriving to fill them. So what explains the housing catastrophe of the past four years if it is not the traditional issues of high migration and low rates of building?

An excellent question.

Here, the Government takes centre stage. In 1989, the then Labour Government changed the Reserve Bank Act to focus monetary policy on keeping prices stable. It recognised that previous monetary policies under Robert Muldoon had made property speculators rich through borrowing to buy property in times of high inflation.

The current Labour Government, then in coalition with NZ First, decided to revert to a formulation of the act similar to that under Muldoon. After receiving advice from Treasury – and, indirectly, from Treasury’s advisers – it widened the act to include a new task for the Reserve Bank: to achieve “maximum sustainable employment” in addition to its price-stability mandate. The amended act came into force in December 2018.

I have seen no record that Treasury warned the Government that this change would lead to asset-price rises, including house prices. This is despite existing studies, including one of my own, showing that setting a “dual mandate” would lead to a ratcheting up of asset prices. The advice also ignored the Muldoon-period experience of property owners getting rich as a result of monetary policy settings that benefit those owning property.

Monetary policy under the amended Reserve Bank Act has lived up to the predictions: it has sparked huge increases in the wealth of property owners at the expense of Māori and Pacific peoples and at the expense of the young. House prices have risen by a staggering 44 per cent in less than three years since the amended act came into force.

Arthur is a former Chair of the Reserve Bank Board, so is an expert on monetary policy.

Housing supply constraints and high migration – which traditionally push up house prices – have not been the culprits on this occasion.

The central culprit has been monetary policy that has flooded the economy with liquidity. This liquidity in turn has found its way into the housing market.

And the result is great for home owners and awful for everyone else.