The Reserve Bank has today announced that they are looking for more weapons in their fight to control inflation. Unfortunately it is New Zealanders that they are fighting and they will fight us on our beach houses, they will fight us in our Towns and City’s. Like Winston Churchill, they will never surrender, especially as their job security rests on keeping inflation within a reasonably narrow band.
With the introduction of the Reserve Bank Act, which was brought about to curb inflation, the Reserve Bank and ordinary New Zealanders have been in a struggle reminiscent of the cold war arms race. The Bank introduced its mighty weapon, altering the Official Cash Rate, which was deployed to influence our spending choices.
In the fight to do what we want with our own or borrowed money, we countered this with a good defensive position and the widespread use of fixed rate home mortgages. However prudent use of fixed rate home mortgages is not a lasting defence against the Reserve Bank. Fixed interest rates will keep the Reserve Banks battering ram from smashing down our defences for a while, but eventually they will smash through our gates when individual fixed term rates end. For many New Zealanders this will be starting to happen right now.
The Reserve Bank, and potentially Treasury as well, have said that Property Investors are a key target for their actions. This is because of a mistaken belief that Investors are the main culprit’s in driving up house prices.
Owner-occupiers, not investors, make the vast majority of property purchases. By targeting investors the Reserve Bank is seeking big changes through influencing the smallest group of property price influencers.
In addition, property investors don’t like to pay market prices let alone higher than market prices. Investors are not carried away with emotion in the same way homebuyers are. Because of this they follow the market up rather than lead it.
Given time the market is going to slow down anyway as it always does. Affordability constraints, reduced demand from lower immigration and rising interest rates will do their job sooner rather than later. It is a shame that the Reserve Bank feels compelled to act quickly and introduce long term solutions to a relatively short term problem.
