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Q+A: Adrian Orr interviewed by Corin Dann

Please find attached the transcript of the interview between our host Corin Dann and the NZ Reserve Bank Governor Adrian Orr on TVNZ1’s Q+A this [Sunday] evening.

1. On the state of the economy in view of business confidence surveys:

ADRIAN: Economic growth has certainly slowed, and we recognise that today (Thursday) in our Monetary Policy Statement. But it’s a very low risk. Our core forecast, the one that we hold most belief in, is that economic activity will actually be picking up from here, not stalling. And the signs are very positive. You’ve got a lower exchange rate, meaning we’re earning more for our offshore efforts; the world growth is still very strong; the government is out spending and investing; households are still consuming, and business investment should be increasing.

CORIN: But we know from the surveys that business confidence is gloomy – as gloomy as the Global Financial Crisis. How serious is that a risk to the economy, in that it leads to that stall?

ADRIAN: It’s a long walk from here to be able to take the pessimistic mood and then talk ourselves into a spiral downwards in economic growth. We actually discount, or don’t even take any notice, of headline business confidence indices; what we look at is firms’ views of their own activity and their—

2. On Auckland house prices:

CORIN: House prices – you do raise some concerns about weak house-price inflation. I think your forecast is pretty flat – maybe 1% or 2%, something like that. What risk is there that actually, house prices might start going off the boil a bit faster than you’re anticipating?

ADRIAN: Yeah. I think there are big risks either side. One concern that we’ve always had, which is why we still have the Loan to Value Ratio in positive territory, is that if we remove that, house prices take off again, or credit growth into those areas – banks start lending – and there’s that upside risk. On the downside risk, asset prices very rarely smoothly transition back to some steady state level. You know, I would--

CORIN: So it could fall? Could go negative?

ADRIAN: Absolutely. Easily. We’re within a wisp of that happening in Auckland housing prices at the moment. You know, if there is a small positive, it doesn’t take much for it back to be a small negative. The important thing is we are only consuming out of that wealth. We’re not consuming out of the income generated from the house, and the wealth is still very high. Putting my ‘financial stability’ hat on rather than the ‘money policy’, I am very, very pleased to see house price growth having eased like it has done, and it’s being very well-behaved.

CORIN: How concerned are you that Sydney, for example, has fallen 5%? The AMP Capital economist Shane Oliver is saying it could go, top to bottom, 10% to 15%. Are you concerned that there is a direct link between markets like Sydney and Auckland and we could see a similar fall here?

ADRIAN: You could see a similar fall. That’s not in our projections, though. I mean, it’s certainly within a realm of possibility. Likewise, you could see a rise. Just to make it clearer, what I’m saying is that a lot of the consumer spending, a lot of economic activity is coming out of income from employment, from investing. The wealth, the asset-price side is very, very high, even if house prices did come off from some level, the level of house prices relative to income is still highly elevated, and there is an enormous amount of total New Zealand wealth captured in the equity in the homes they own. Now, a house price decline does not mean a housing market crisis. Far from it.

3. On Loan to Value Ratios:

ADRIAN: We’re still on the ground doing the work to say, ‘Are the incentive structures there? Are the remediation things in place?’ So we’ll be back in mid-October with our review. But the real challenge is – what I know at the moment – is that when you put an LVR lending restriction at a certain level, guess where the lending goes to. And then you put it at a level; goes to. And so I keep thinking, ‘Why do we have to be the ones putting these restrictions on all of the time? Why can’t they be responsible around lending to people who truly can afford, through good times and bad, to meet that debt?

END

Q + A
Episode 22
ADRIAN ORR
Interviewed by Corin Dann

ADRIAN Economic growth has certainly slowed, and we recognise that today in our Monetary Policy Statement. But it’s a very low risk. Our core forecast, the one that we hold most belief in, is that economic activity will actually be picking up from here, not stalling. And the signs are very positive. You’ve got a lower exchange rate, meaning we’re earning more for our offshore efforts; the world growth is still very strong; the government is out spending and investing; households are still consuming, and business investment should be increasing.

CORIN But we know from the surveys that business confidence is gloomy – as gloomy as the Global Financial Crisis. How serious is that a risk to the economy, in that it leads to that stall?

ADRIAN It’s a long walk from here to be able to take the pessimistic mood and then talk ourselves into a spiral downwards in economic growth. We actually discount, or don’t even take any notice, of headline business confidence indices; what we look at is firms’ views of their own activity and their--

CORIN And they’re down, though. They’re down.

ADRIAN They are down, but they’re still positive, and they are down far, far less than business confidence itself. And in our projection, and what I’ve just talked about, we actually have investment quite ‘subdued relative to the traditional underlying indicators’.

CORIN Is this just what the government says, which is ‘an irrational response to a Labour government’?

ADRIAN I don’t know what the business confidence response is. All I can tell you is that economic growth is still very positive; world economic growth is positive; interest rates are very stimulative; the government will be investing a lot.

CORIN David Parker says these surveys are junk. Are these business confidence surveys junk?

ADRIAN Business, the headline business confidence, we ourselves in terms of information content, for looking ahead, we discount them. We don’t look at them. What we look at is the surveys. There are many questions in those surveys, and the more interesting ones are around your own activity and your--

CORIN So they’re not junk?

ADRIAN So parts of them are not junk. Some of it is headlined emotion around I don’t know what the emotion is, but the other parts generally are correlated with what’s going on at the moment. They’re not very good lead indicators, but they at least tell you how are they feeling--

CORIN So what’s your message to business, then? Do they just need to buck up their ideas or something?

ADRIAN You know, when I look at it, I see capacity constraints always and everywhere. I see demand is still very strong. I see the labour market very tight. All of these are very traditional indicators for a good time to invest. What’s helping me make that investment? Interest rates are low; the cost of capital is low. So all it signals are you should be investing. What could be holding businesses up? Without doubt there is a lot of reviews going on around the government’s--

CORIN Or let’s be blunt, Employment Law review. That’s the one that’s upsetting them.

ADRIAN There is employment; there’s the Tax Working Group; there’s environmental considerations going on. So you know it really is in the government’s position to say what isn’t going to happen, which may be concerning people, as much as what might happen.

CORIN The government argues that the reason why businesses are uncertain is that they are transitioning the economy, from one where it’s focused on house prices, population growth, this sort of stuff, to one that supposedly more export-driven. Do you buy that? Is that what you are seeing? Are you seeing this transition, and is that causing the uncertainity?

ADRIAN I do buy that. I don’t know if that’s causing the uncertainty. But certainly when you look at what are the drivers of economic activity now and towards the next two to three years, they are very different to the drivers of the last three to five years. The drivers were, exactly, recovery from the GFC, recovery from the Christchurch earthquake, very large population growth, and asset prices rising from very subdued levels back to very elevated levels. So that was all about more people, more consumption and thus wealth. Looking forward, it’s about driving growth. It’s about earning; it’s about the export-earning structures, the lower exchange rate, the continued world growth; good terms of trade. That’s about earning, producing product, and it’s about government investing and private sector investing.

CORIN The flipside of that is for some consumers, there’s winners and losers, isn’t there? House prices – you do raise some concerns about weak house-price inflation. I think your forecast is pretty flat – maybe 1% or 2%, something like that. What risk is there that actually, house prices might start going off the boil a bit faster than you’re anticipating?

ADRIAN Yeah. I think there are big risks either side. One concern that we’ve always had, which is why we still have the Loan to Value Ratio in positive territory, is that if we remove that, house prices take off again, or credit growth into those areas – banks start lending – and there’s that upside risk. On the downside risk, asset prices very rarely smoothly transition back to some steady state level. You know, I would--

CORIN So it could fall? Could go negative?

ADRIAN Absolutely. Easily. We’re within a wisp of that happening in Auckland housing prices at the moment. You know, if there is a small positive, it doesn’t take much for it back to be a small negative. The important thing is we are only consuming out of that wealth. We’re not consuming out of the income generated from the house, and the wealth is still very high. Putting my ‘financial stability’ hat on rather than the ‘money policy’, I am very, very pleased to see house price growth having eased like it has done, and it’s being very well-behaved.

CORIN How concerned are you that Sydney, for example, has fallen 5%? The AMP Capital economist Shane Oliver is saying it could go, top to bottom, 10% to 15%. Are you concerned that there is a direct link between markets like Sydney and Auckland and we could see a similar fall here?

ADRIAN You could see a similar fall. That’s not in our projections, though. I mean, it’s certainly within a realm of possibility. Likewise, you could see a rise. Just to make it clearer, what I’m saying is that a lot of the consumer spending, a lot of economic activity is coming out of income from employment, from investing. The wealth, the asset-price side is very, very high, even if house prices did come off from some level, the level of house prices relative to income is still highly elevated, and there is an enormous amount of total New Zealand wealth captured in the equity in the homes they own. Now, a house price decline does not mean a housing market crisis. Far from it.

CORIN Would you respond with the LVRs first thing to go? When can we expect to see these lending restrictions lifted?

ADRIAN This is a very Auckland-dominated discussion around house prices here, around an export-driven side, but, well, you know, the elevation has been largely in the Auckland region, and that is the region where it has come off most. But, by the way, there’s still strong demand for housing and a shortage of housing. So the asset price versus the undying economic activity is very different. The underlying economic activity will still be about build, because building is needed. It’s about KiwiBuild; it’s about all the other residential buildings going on. What happens or not to house prices is in the hands of speculators, investors. The number one thing a household needs to think about is not necessarily, ‘What price is my house,’ but, ‘Am I going to be employed? Can I afford to continue to pay that mortgage?’ And that is the area where we are very comfortable in.

CORIN Have you thought, though, about removing the Loan to Value Ratios yet?

ADRIAN That’s next on our decision. So our decision today was based on where the LVR is at the moment. But without doubt, we’re going to have to re-put our thinking caps on and say, ‘What, in addition, have we learnt since we last looked at this?’ When we last looked at it, our nervousness there was still around, ‘Has it slowed for long enough to give us confidence that this credit growth…’ By the way, I’m talking about credit growth manifesting in house prices. Has credit growth slowed down enough in those deep pockets of high indebtedness, that we feel comfortable to remove it? We weren’t there at that point. We’ve had a few more months--

CORIN A bit closer?

ADRIAN We are a bit closer, without doubt. So we’ve had a few more months. The second part of the equation, and the one where I don’t really know how to answer, and part of our banking conduct review will help, is – are banks going to be more responsible about their lending back into those sectors?

CORIN I wonder if they are already. I mean, certainly mortgage brokers would argue that the Royal Commission in Australia has had quite a pervasive impact into lending in New Zealand.

ADRIAN You are seeing that side, and may it be the case. We’re still on the ground doing the work to say, ‘Are the incentive structures there? Are the remediation things in place?’ So we’ll be back in mid-October with our review. But the real challenge is – what I know at the moment – is that when you put an LVR lending restriction at a certain level, guess where the lending goes to. And then you put it at a level; goes to. And so I keep thinking, ‘Why do we have to be the ones putting these restrictions on all of the time? Why can’t they be responsible around lending to people who truly can afford, through good times and bad, to meet that debt?

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