Hamish Rutherford: Grant Robertson shares the problem of house prices, complicating the Reserve Bank’s job


Not only has Grant Robertson managed to see nothing but good news in a sharp deterioration in the Government’s finances, he has managed to make one of his problems a bigger one for someone else.

Treasury released the Government’s accounts for the year to June 30 on Tuesday, showing a deficit of $23.1 billion, the largest in New Zealand’s history.

For the Finance Minister, the only mention of the deficit was that it might have been worse, with the huge sum coming in $5.2b below what the Treasury had forecast back in May.

Likewise, debt levels were also good. Net core Crown debt stood at $83.4b at the end of June, an increase of about $500 million for an entire year (and a figure which has risen by several billion since).

Robertson pointed out that the Treasury expected the debt pile to be even higher six months ago, more signs of a “stronger-than-expected” economy.

Explosive house price increases at a time of economic troubles, fuelling anger among the young and booting wealth among the already wealthy? A sign of how well New Zealand is doing, apparently.

Robertson said the issue lay with “stronger-than-expected economic performance” flowing through to demand.

At least in his press release, Robertson made no mention of the flood of billions of dollars of cheap money being pumped into the economy, a key reason behind both the rise in asset prices and the economy remaining in relatively healthy shape, even after a sharp recession.

The rise in house prices prompted Robertson to write to Reserve Bank governor Adrian Orr to ask him for his views on how “the Government and Reserve Bank can work together to address the issue of rising house prices”.

Another interpretation would be that Robertson wants his problem to also be the Reserve Bank’s problem. He does so in a way which makes Orr’s job significantly more complicated.

Earlier this month the governor bristled at questions about the impact of rising asset prices, reminding reporters that the Reserve Bank’s job was to target low and stable inflation and maximising employment.

House prices were only an issue for the Reserve Bank insofar as they affected financial stability.

The reason Orr has to target both inflation and employment is because Robertson, as the incoming Finance Minister, broadened its mandate to include the labour market when Orr was appointed.

At the time, economist Cameron Bagrie warned that, by definition, you can’t aim for two targets at once.

Adding a subtle message about avoiding instability in house prices is only likely to confuse matters further, more so because of the way Robertson has gone about it.
In broad terms, Robertson’s picture of the New Zealand economy is correct; it is better than was expected a few months ago, and other countries would like to have our problems.

It is also welcome that he announced a review of New Zealand’s housing settings, although it is unclear why it took so long for this to happen, given years of warnings about the impact of spiralling housing costs.

But he sugar coats what is happening and why. Billions of dollars is being spent keeping things together, and in the case of low interest rates, keeping confidence up.

The Reserve Bank has said that rising house prices is a good problem to have, because it makes homeowners feel wealthier and therefore more likely to spend.

Robertson’s intervention – in the normal course of events -would not directly undermine the Reserve Bank’s independence.

All he is suggesting is a subtle tweak of the Reserve Bank’s remit which are periodically reviewed.

But the timing is so utterly political that it puts the Reserve Bank governor in an awkward position.

Not only is Robertson heralding his letter to Orr at a time when house prices are headline news, he does so a day ahead of a major Reserve Bank press conference on Wednesday, when it releases the six-monthly financial stability report.

Had he done so quietly at any other time, the Reserve Bank could have responded carefully.

His move on Tuesday makes it very likely that Orr will be forced to explain what he is going to do about the Finance Minister’s message that he should try to solve rising house prices.

Not only are house prices not the Reserve Bank’s problem, part of the reason he has been fuelling them is that Robertson made keeping the job market buoyant.

The more things Robertson asks Orr to focus on, the less likely the Reserve Bank will be able to solve any of the Government’s problems.

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