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How Are Policymakers Dealing With Red-Hot Property Bubble?


  • The government and the Reserve Bank are leaving no stone unturned to calm the overheating housing market fuelled by record-high property prices.
  • The policymakers are adopting various methods to tackle the housing crisis, like adding housing to RBNZ’s mandate, enforcing firmer LVR restrictions and scrapping RMA.
  • It is yet to be seen whether these approaches will make any significant difference in controlling super-charged housing prices.

Since the onset of the pandemic, the property market has been grabbing eyeballs for defying expectations. The house prices are soaring to record-high levels despite the virus-induced economic slump. Undoubtedly, the housing market has been instrumental in driving the nation’s recovery from the COVID recession. Having said that, concerns are mounting over a potential burst of property bubble if the house price rally continues to persist.

The housing market has covered an exceptional journey in terms of property prices, brushing aside the COVID-19 risks. The market remained buoyant in January 2021 despite most New Zealanders taking a summer holiday.

The most recent data from the Real Estate Institute of New Zealand (REINZ) suggests that median house prices across the country rose by 19.3 per cent in January to NZ$730,300. Although median house prices were marginally down from December, property prices held up better than one could normally project when moving from December to January.

A continued and unusual rise in house prices is calling for urgent action to tackle the unaffordability challenges of low-income households. Let us zoom our lens on how the policymakers are coping with the nation’s housing bubble:

Including Housing to RBNZ’s Mandate

To calm the red-hot housing market, the government has recently tasked the central bank to evaluate the impact of its financial and monetary policy decisions on property prices. It means that the RBNZ will now have to consider housing while setting interest rates. This change is expected to restrict the RBNZ’s ability to continue running loose monetary policy.

The record-low borrowing costs offered by RBNZ has been a key reason behind the overheating housing market. The central bank’s decision to reduce the cash rate and kick-start quantitative easing amidst pandemic made borrowings cheaper, fuelling house prices. This, in turn, made housing affordability a major concern for first-home buyers.

The inclusion of housing to the Monetary Policy Committee’s remit is expected to put more pressure on the central bank to increase interest rates in the near future to fix the property crisis. Besides, the move suggests that the negative interest rates are now completely off the cards in Kiwi Land.

Implementing Stringent LVR Restrictions

To cool off the property market spinning out of control, the Reserve Bank recently re-introduced more stringent LVR (loan-to-value ratio) restrictions on home loans effective March 2021. These restrictions were initially lifted in April 2020 amid fears of house price fall amid the virus concerns. However, the ongoing rally in the property market has forced the central bank to reinstate them.

As per the new LVR restrictions, first home buyers are required to stump up a deposit of 20% to get a loan, while investors will need a 30% deposit to get a mortgage. The deposit required by investors will further rise to 40% in May. The move is expected to slow down the property market, making it quite harder for investors and first home buyers to enter the market.

With the new LVR restrictions, the central bank intends to lessen the risks to financial stability resulting from a sharp correction in the property market. However, speculations are rife that these restrictions will not make any significant difference to the property investors who have reaped the rewards of house price rally with more deposits in hand.

Scrapping Resource Management Act

To tackle the spiralling housing crisis, the government recently decided to scrap and replace the Resource Management Act (RMA), marking one of the biggest regulatory shake-ups in the nation’s history. The government plans to replace the 30-year-old RMA with three brand-new pieces of legislation targeting development, environment and climate mitigation.

The new RMA reforms are expected to free up more land for housing, accelerating the speed and scale of building houses in the country. This is further likely to fill the housing supply shortage, which has been a fundamental cause behind the growing property prices.

Although the proposed RMA overhaul holds significant potential to bolster housing affordability and address housing supply shortages, it will take some time for these reforms to be bedded in.

While the policymakers are pulling out all the stops to curb house price inflation, the current scenario calls for a dedicated focus on building houses with an effective analysis of the path to ownership. Besides, it seems imperative to streamline home renting along with the home building to prevent the elevated cost of house rent, which further triggers the housing crisis.

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