CTU Media Release

14 March 2013

Don't let house price inflation drive the rest of the economy

"While the Reserve Bank has clearly signalled that any increase in its
official cash rate is unlikely before the end of the year, it would be
wrong to raise interest rates after that time solely because of the
threat of house price inflation", says Bill Rosenberg, CTU Economist.

"The Reserve Bank clearly sees house prices and construction costs as
the biggest inflationary threats, but on the whole inflationary
pressures are low."

"It acknowledges the weakness of the labour market, with unemployment as
high it has been since the beginning of the global financial crisis and
weak wage growth. Growth in the economy is being held back by Government
cuts in expenditure, and the only real areas of growth identified are
the Christchurch rebuild and construction."

"If it considers that house prices are the biggest inflationary threat,
it should not repeat the mistakes of the 2000s and raise interest rates
simply to try to control house prices. That would kill growth in the
rest of the economy. It should be getting macro-prudential policy tools
ready to go, like loan to value ratios, so it can directly address house
price inflation without damaging other parts of the economy."

"So far it has said it will only use these macro-prudential tools for
financial stability purposes. It must be prepared to use them to
directly address house price inflation too, and the Government should
change the Reserve Bank's legislation to allow that if necessary."

"The Government and Reserve Bank must also ensure that the use of these
tools does not hit first home buyers. For example, the Government could
be ramping up low cost housing construction while providing assistance
for first home buyers, while the Reserve Bank is aiming policies such as
loan-to-value ratios (LVRs) at house purchases for investment purposes."

"Macro-prudential policies should also be developed to manage the
exchange rate," said Bill Rosenberg.

ENDS

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