Q+A: Finance Minister Bill English interviewed by Corin Dann

Q + A
Episode 36
BILL ENGLISH
Interviewed by CORIN DANN

GREG Corin began by asking whether he thought interest rates had hit rock bottom.

BILL We’ve got the lowest interest rates in 50 years. We thought late last year that they were about as low as they could go, and they’ve kept going lower. I wouldn’t want to say it’s the bottom yet. If you look around the world, we still have relatively high interest rates compared to a lot of countries who have 1% or 0% rates.

CORIN This is interesting, isn’t it? Because the Reserve Bank governor is still holding out hope for some sort of inflation coming back into the picture, but if you look around the world, we’re seeing very, very, very low inflation. You’ve been out and talking to people in the world. Do you think the world has changed now; we should be getting used to low interest rates?

BILL Well, I think we are getting used to lower interest rates. I mean, they’re the lowest they’ve been for 50 years. They’ve stayed lower for longer than we thought. The prospect of interest rates rising looks a few years away yet. I mean, I think we will see the return of some inflation, but not in the way we used to have. In past economic cycles, mid-1990s, mid-2000s, as the economy grew , interest rates were heading to 7% or 8%, and here we are with rates under 5%. So it’s going to be lower for longer.

CORIN You said last week that if they hit 7% that would cause a political problem, some political pressure. What did you mean by that?

BILL Well, that was just speculating about the issues around housing. So we’ve got people paying big prices for houses, and one of the reasons they can do that is interest rates are so low. Over time, if interest rates rise, some of those people with high levels of debt will come under a bit of pressure.

CORIN What are you saying, though? That it’s almost as if the Auckland market has now got too big to fail, because they’re going to come knocking on your door if we have a situation where interest rates did go back up to 7%, 8%?

BILL Well, I mean, that market’s knocking on our door now. We’re going through the process of getting more social housing in Auckland. And the cost of procuring another 300 houses at the moment in Auckland for social housing is much higher than what we’d been paying in the past. And the government subsidises half of all rentals right across New Zealand. So we get to see the hard edge of the housing market.

CORIN Which in other words means you’re having to… Currently you transfer, what, a couple of billion dollars to help people into housing around the country. You’re saying that bill could go up considerably if this house-price situation in Auckland continues.

BILL Well, it’s going up considerably now. I mean, the state housing subsidies are rising 70 million, 80 million a year. So it was 600 million; now it’s getting up towards 800 million.

CORIN So it’s hurting you in the pocket, hurting the taxpayer in the pocket, it’s a financial stability risk, the Auckland market; why aren’t you doing more about it?

BILL Well, we’re doing as much as we feasibly can right now, and that is working with the Auckland City Council particularly over its new plan, which is going to reset the rules for Auckland. The new action we’re taking is to crank up the government supply. So we’ve got government-owned land. Those transactions are getting underway. But over the next 12 months, the government will be procuring the capacity to develop thousands of houses, and that’s a process we’re just getting started on, because there’s a lot more to do in Auckland.

CORIN But you know that even if you bring on thousands more houses, you’ve got net migration running at 60,000-plus; you’re not going to be able to keep up.

BILL We will eventually catch up. Consents at the moment are the highest they’ve been in 10 years, and they are continuing to rise. So the rate of build is as high as it’s been for a long time, and it’s rising, and as the government comes in the market, it’ll rise further.

CORIN But is ‘eventually going to catch up’ good enough for the first-home buyer who might have voted for you at the last election? You gave them a little help with some KiwiSaver HomeStarts and things. They’re still facing an Auckland housing market with 25% per annum increases. They haven’t got a hope of getting in.

BILL It is really tough for them, and that is a big motivation for changing this. The thing to remember with housing is this: we would like to solve that problem tomorrow; the pipeline for developing new housing is pretty long, and a lot of that is to do with community concern, that is, people don’t want apartments, so you’ve got to go through a big consent process; they don’t like greenfields.

CORIN 41% of the new houses being bought is by residential property investors. It might have dropped a little bit in the last few weeks. You could just put up the capital gains tax. You could put your bright-line test up to 10 years. You could stop it.

BILL Well, we’re taking some measures to put a few hurdles in the way there for people who are really—

CORIN But the last statistics show that hasn’t done anything yet.

BILL That’s because they only came in the 1st of October and there’ll be another tranche with the withholding tax on foreign buyers in April. But just remember, in all those investor houses, people are living in them. At the moment, we actually want more supply, so you don’t want to create a set of rules that mean new houses won’t be built. Right now we need a lot of new houses.

CORIN The income ratio in Auckland must be concerning. You’re talking 10 times the median household income for a median-priced house in Auckland. That is extraordinary. That’s way off the charts compared to anywhere else in the world, practically. How can we sustain that?

BILL Well, it’s probably not sustainable. That ratio would have to come down just because people can’t afford to pay nine times the median income for the median house. But it’s a product of 15 or 20 years of misjudged planning in Auckland – plans that were designed to stop the city growing up and to stop it growing out.

CORIN We know the Reserve Bank is looking at income ratio caps. The Bank of England uses them. It sets them at 4½ times income, limits what people can borrow. Treasury now, it appears, supports the idea. Presumably they’ve given you some advice on it. Why not just introduce a cap that says you cannot borrow more than 4½ times your income?

BILL The LVRs are a pretty good proxy for that – so, the LVR restrictions which are already in place around the value of the house that you can borrow. And now it’s coming in for investors this weekend, on the 1st of November. So we’ll see how that plays out. But I think the experience of all these things around the world – of all those demand restrictions – is that they may have some impact, but the long-term issue with supply… I’ve just spoken with the Victorian treasurer, where in Melbourne they tried some fairly draconian measures; didn’t have much impact on demand. In the end, they’ve taken measures around supply, which over a period of five or six years, have made an impact.

CORIN The bottom line is, though, if the Reserve Bank governor can’t see Auckland house prices coming down in the next three or four months, he is going to come to you, isn’t he, and the next cab off the rank is income ratios. Do you accept that?

BILL Well, he’s got some independence around these issues, and he could raise that issue. He hasn’t so far.

CORIN We know he’s looking at it. You must be expecting him one day to come and knock on your door and say, ‘I’m going to do this,’ and that would present an enormous political problem for you, wouldn’t it?

BILL Look, the Reserve Bank governor will do what he’s going to do, so I’m not expecting him to do that in a hurry. And he may do, and if he does, it’s still up to him to make the rules. What he does do regularly is say supply needs to expand more quickly. In his statements just in the last couple of days, he’s indicated the Bank can see the supply expanding; they’ve been pretty impatient about that. So we’re making progress – not as fast as we’d like but about as fast as the Auckland Council and the Auckland community can handle.

CORIN Would you rule it out, though? Would you say, ‘No, you can’t do income ratios’?

BILL No, I wouldn’t rule it out. There’s no obvious reason to rule it out. We’re flat out working on the supply side. And the next steps there are to go to the market for procurement on the government-owned land, to launch a procurement for up to 8000 houses in Tamaki and develop a pipeline for other large procurements so that the market can see the government building thousands of houses in Auckland out over the next five to seven years.

CORIN Let’s talk now about the Productivity Commission. You have asked them, as of today, I understand, to look at the big issues around urban planning, the big bottlenecks that you’ve got at the Auckland Council. Are you effectively saying here to New Zealanders we need to maybe think about whether we’ve got to get rid of the RMA, we’ve got to get rid of the local government rules and start again?

BILL Well, we’re not proposing to get rid of those pieces of legislation. In fact, we’re proposing some significant reforms to the RMA, and they are the rules that will be in place for some time. But I think everyone, local government, planners, developers, certainly politicians, are getting to the end of their tether around further minor adjustments to the planning rules. We’ve developed a planning process that’s become expensive and long-winded, and one of the bad effects– it’s had some good effects, but one of the bad effects is housing affordability is a problem. So we’ve asked the Productivity Commission to do some blue-skies thinking, and that is to say to them, ‘Putting aside the current framework – RMA, Local Government Act, Transport Act; all of which have a big impact on how our cities develop and how they’re planned – how would you do it if you were going to review the whole thing?’

CORIN So could we end up with a situation where you go back to the future and we have town-planning laws and country-planning laws?

BILL Well, it’s possible. I mean, let’s see what they come up. But in the meantime – and by the meantime, I mean the next three to four years – we’ve got to make the system work as it is, because today there are home buyers out there who would prefer to be able to buy a home, the government’s shelling out tens of millions more to subsidise accommodation costs in the high-growth markets, and we’ve got to keep working with the councils to get the number of houses on the ground up faster.

CORIN I wonder, though, would it be much easier if you had a right-wing council; for example, in Auckland, if you had a centre-right mayor?

BILL Well, that’s up to Auckland, and they’ve got an election next year, and they’ll sort out what they want. Auckland Council is working with… It has been working a traditional mode of local government in New Zealand, which has been a bit slow to react to growth. Now, we see a sea change in local government going on, not just on housing, but on their understanding and interest in their own role in promoting economic growth. So I think we’re getting a pretty good positive response from local…

CORIN Would you like to see Len Brown have another round? Has he been positive for you in trying to get your housing stuff done?

BILL We’ve found the Auckland Council positive to work with. Pretty tense at times, because we’ve got a national view, they’ve got a local view. They do have to deal with individual ratepayers worried about their rates, worried about what’s going to be built in their street. So there’s a natural tension, but we found a pretty good constructive way to work. And over the last year or two, since we brought in Special Housing Areas, we’ve made quite significant progress, and it shows up in the number of houses being built.

CORIN I’ve got to ask you before I go – what about if Phil Goff became mayor? Do you think that would be an improvement?

BILL Well, look, it is entirely up to whoever they elect. What we do know is whoever gets elected there next time needs to understand that the decisions they make – and it’s actually the same in other councils around the county – the decisions they make have a big impact on households and the cost of housing and a big impact on the wider economy. This is a problem that can be solved. It’s complex and we’ve got to be patient, but we will solve it.

CORIN Brilliant. Thank you very much, Bill English. Thanks for your time.

BILL Thank you.

ENDS

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