Norman Russel: Motions — Reserve Bank—Ratification of Funding AgreementText is incorporated into the Bound VolumeNorman Russel: Motions — Reserve Bank—Ratification of Funding Agreement[Sitting date: 04 June 2015. Volume:706;Page:4349. Text is incorporated into the Bound Volume.]Dr RUSSEL NORMAN (Green): I rise on behalf of the Green Party to speak in favour of the Government motion No. 1 with regard to the funding agreement between the Reserve Bank and the Minister of Finance. The kinds of activities that are financed by this funding agreement are of two basic natures. There is price stability and there is financial stability. For the first probably almost 20 years of the operation of the Reserve Bank of New Zealand Act—so through the 1990s and up to the global financial crisis—the main focus of the debate really was around price stability. The issue was around the operation of monetary policy and the way the Reserve Bank operated monetary policy.Essentially the Reserve Bank had a single tool to achieve a single objective. So it had the official cash rate and interest rates attached to the official cash rate in order to achieve a single target—inflation—within certain bounds. The debate that occurred around the Reserve Bank’s activities—activities that are funded by this funding agreement—was really that by targeting inflation with a single tool effectively what the Reserve Bank was doing was consistently crushing activity in the tradable sector and in the productive sector by driving up interest rates very high and by increasing the value of the New Zealand currency by having high interest rates or high official cash rates; that is that the tradable or productive sector of the New Zealand economy was consistently affected in a negative way by this particular approach.The question was whether it was it too narrow a target just to have inflation alone as the kind of activity funded by this agreement or whether the New Zealand Reserve Bank should be like pretty much every other Reserve Bank in having more than one target—essentially having an inflation target on the one hand and having some kind of other economic activity target on the other whether it was external imbalances whether it was employment whether it was GDP output. So the debate was about whether we were really restricting ourselves by just having one target for the Reserve Bank—inflation.The second question was whether the official cash rate was the right tool to tackle inflation coming out of particular sectors of the economy anyway. In particular as we came through the early 2000s when we had this massive housing bubble from 2002 to 2007 when the price of housing doubled in the space of less than 7 years the question was whether the official cash rate was actually the right tool to deal with the inflation that was coming out of the housing sector or whether we should have had tools that were specifically focused on asset inflation coming out in that sector.A lot of this debate then was superseded by what happened during the global financial crisis because the second part of the Reserve Bank’s activities which never received a lot of attention prior to that of course was financial stability. Post the global financial crisis and the collapse of the finance companies and with a global focus on financial sector stability that part of the Reserve Bank’s mandate has come to the fore.What we have seen is a very creative response in many respects by the Reserve Bank in which it has used its mandate under financial stability in order to try to tackle some of the asset bubble problems in the Auckland housing market. So we have seen the evolution of the loan-to-value ratios produced by the Reserve Bank targeting that problem and then more recently we have seen the restrictions on loans to investors going specifically into the Auckland housing market. So there have been some very interesting developments in terms of the activities of the Reserve Bank things that 15 years ago—or even 10 years ago—no one would have guessed that the Reserve Bank was going to be doing and that were part of the debate.The issue now is the crossover between the two kinds of activities of the Reserve Bank: the price stability activity and the financial sector stability activity because by targeting the Auckland housing market and trying to restrict asset inflation in the Auckland housing market it is actually also helping the other objective. It is targeting the Auckland housing market with the objective so it says of financial stability because we do not want the Auckland housing market to get out of control but it does also have other benefits in terms of price stability. So in the other kind of activity that the Reserve Bank is financed to do which is around price stability there is a synergistic kind of relationship by the targeting of the Auckland housing market in terms of inflation.Except of course that what has happened now is inflation is just not really a problem at all. We are seeing extremely low levels of inflation and so now it is really the targeting of the Auckland housing market by the Reserve Bank that has become one of its No. 1 focuses. In this respect I think it is important to see that the Reserve Bank’s activities really need to be complementary with central government and there needs to be a synergy between the Reserve Bank and the rest.The Government to give it its due has introduced a capital gains tax. It is of a very limited nature but it has some benefits in terms of controlling asset inflation in the Auckland housing market. Also some of the restrictions around foreign buyers—the requirement to lodge a tax number—I think will help a little bit as well. That will assist the Reserve Bank in its job in trying to control the bubble in the Auckland housing market.The Government says that it is increasing supply and the Reserve Bank has spoken repeatedly about the need to increase supply. The thing is when we had the Reserve Bank Governor in front of the Finance and Expenditure Committee recently he made the point that if you really wanted to increase supply rapidly and affordably in Auckland it had to be via apartments. This idea that we can get out of there and—David Seymour: That’s the point you made—it’s not the point he made.Dr RUSSEL NORMAN: It is the point I made and the Reserve Bank Governor agreed with that point and if you read the transcript you will see that that is actually on the record. The way to actually increase housing supply quickly in Auckland is through apartments not through sprawl. In fact you cannot beat the problem through sprawl; there is just no way that you can increase supply fast enough. So if you are actually going to deal with that supply problem and support the Reserve Bank in its activities—the Reserve Bank activities trying to control the Auckland housing bubble as is financed by this agreement that we are discussing today—then you need to deal with that problem. Compact urban form not sprawl is going to be much more helpful in terms of dealing with the Auckland housing problem.There is also the issue of foreign buyers which was discussed by the Reserve Bank Governor and we discussed it in the Finance and Expenditure Committee with the Reserve Bank Governor on many occasions. The issue is we do not really know the exact level of offshore demand for Auckland housing and there is a lot of conjecture as to what exactly it is. We do know it is very significant and in other markets similar to the Auckland housing market in Sydney Melbourne and Toronto we are seeing a very significant impact from offshore buyers—Mr DEPUTY SPEAKER: Order! I just have to raise with the member the point I made with the previous speaker and that is that the specific motion ratifies the Reserve Bank’s funding agreement between the Minister and the governor. So he needs to tailor his address in relation to that funding arrangement rather than the other mechanisms he has spoken about or appearances before select committees.Dr RUSSEL NORMAN: So part of what this agreement finances is the operations of the Reserve Bank including paying the Reserve Bank Governor. And the Reserve Bank Governor as part of his job appears in front of the Finance and Expenditure Committee on a regular basis and as part of his job has made many comments about foreign buyers of housing and has debated with pretty much everyone—Mr DEPUTY SPEAKER: And the funding—Dr RUSSEL NORMAN: —to try to figure out what the issue is. The funding agreement funds the Reserve Bank to do all of these activities. It could not do any of these activities were it not for this motion that we are debating right now. So I am discussing the activities financed by this motion that Parliament is currently debating. That is around the Reserve Bank’s interventions on financial stability. Part of that is about trying to control the Auckland housing market. We know that the foreign buyers are a big problem because there may well be unlimited offshore demand for housing in Auckland. So what on earth do you do about that? Can you build your way out of that on the supply side? It is not at all clear that you can.One of the issues that the Reserve Bank and all of us are trying to get our heads around is whether you can control the housing asset bubble in Auckland simply by building more urban sprawl. I think the answer is no. I think this is one of the issues that the Reserve Bank Governor has consistently brought up because financial stability is part of the mandate of the Reserve Bank as is paid for by this motion right in front of the House today. That is how it works. That is part of the history of the debate—how we have ended up now and the two components of the Reserve Bank’s activities which are price stability and financial stability. Price stability was the big focus of the early part of the history after the Reserve Bank of New Zealand Act got passed and then financial stability has been the real focus now.But we really do need the Government to help the Reserve Bank in what it is trying to achieve in the Auckland housing market. At the moment it is not getting as much help as it really needs and is having to carry a lot of the load using the money that we are talking about in this motion right now in developing policy in order to control housing price inflation coming out of Auckland. We need the Government to help out more.