Central Banks Should Stay Away From House Prices

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The government of New Zealand is unhappy with surging house prices and wants the central bank to take more responsibility. Though the new requirement that it factor the prices into its policies falls short of changing the bank’s mandate, it will muddle its decision making—and would do the same if it were adopted elsewhere.

The cost of housing and the price of houses aren’t the same thing. Clearly, the rampant rise in house prices across New Zealand—up by more than 100% over the past 15 years—has outstripped growth in average weekly earnings of more like 60%. But rental prices have risen only 40% over the same period. The latter is already included in the consumer-price index that the central bank targets.

Of course, rental prices have risen more sharply for some places than others and perhaps for some property types, too. But then the argument becomes even more absurd. How much should a central banker weigh the rental price of one- and two-bedroom apartments and houses in popular cities when setting an interest rate that applies to every homeowner, home buyer, renter, manufacturer and farmer in the country?

Some central banks have been given an expanded role in tackling house-price booms but, crucially, with credit-related tools specific to the housing market. Monetary policy is a poor tool for fine-tuning different sectors of the economy.

If governments are seriously concerned about house prices, many tools are within their reach. New Zealand’s Social Policy Research and Evaluation Unit suggested in 2017 that the country’s land-use regulations were driving up prices and particularly influencing places where prices have risen moderately and places where they have surged.

New Zealand’s ratio of debt to gross domestic product fell by 15 percentage points between mid-2012 and early 2019, even as interest rates declined. If central banks have to sustain economic growth on their own without substantial fiscal help, then it shouldn’t be a surprise when interest rates have an outsize effect on market conditions. Milton Friedman once said that low interest rates were a sign that monetary policy had been too tight, rather than too loose. Similarly, house prices running well above earnings may be a sign that economic policy overall has been too austere, not too stimulative.

Monetary policy is a blunt tool even for tackling relatively broad objectives like employment and consumer-price inflation. Giving central bankers an additional and probably contradictory objective to struggle with is the wrong move.

Write to Mike Bird at Mike.Bird@wsj.com

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