Thomas Coughlan: Treasury’s been getting it wrong on house prices, it should be forced to explain why


Last year, decisions made by ministers and officials fuelled the largest increase in house prices in modern times. Those increases were made in defiance of expectations and Government policy, which in the words of Prime Minister Jacinda Ardern was for prices to stabilise.

Now, a group of MPs from parties as disparate as the Greens, National and Act want the Government to come clean with some of the thinking behind the policy choices that led to those price rises by hauling Treasury officials before Parliament’s Finance and Expenditure Committee.

They have a point.

The nub of the problem is Treasury’s house price forecasts, which were catastrophically wrong for most of last year, with Treasury repeatedly saying from April to December that prices would fall. Green MP Chlöe Swarbrick has been trying to haul Treasury officials before the select committee to explain how it got things so wrong.

She’s been backed by National’s housing spokeswoman Nicola Willis who feels she hasn’t had adequate responses to her questions in the committee.

It’s not as wonkish as it sounds. Treasury’s forecasts are meant to be the gold standard. Treasury officials can draw on untold amounts of data from the public and private sectors to work out which direction the economic winds are blowing. It’s important that it gets those trends right because Treasury’s economic data is used to inform the Government’s decisions, which ripple through the entire economy.

When it comes to house prices, those forecasts have been badly wrong and they’ve set the scene for Government policy decisions that have inflated the housing market rather than cooling it down.

The key offender here is something called Large-Scale Asset Purchases (LSAP), the Reserve Bank’s policy of printing tens of billions of dollars of digital money to keep interest rates low.

LSAP was designed to keep interest rates low, encouraging spending to keep the economy functioning as normal. Before the pandemic, Robertson had been warned that a policy like this could exacerbate inequality by pumping up the prices of assets like houses.

But by the time LSAP was being rolled out, Treasury wasn’t concerned with inflating house prices. Instead, it incorrectly believed house prices would drop, despite the Bank’s intervention.

Treasury’s policy advice was right – its forecasting was terribly wrong, and it kept getting those forecasts wrong that year.

At the Budget last year, it was still forecasting a slight dip in house prices – this didn’t happen; at the pre-election update in September it was once again forecasting a slight dip in house prices – this didn’t happen either; just a few months later, in its December forecasts, it changed its tune, correctly forecasting house prices increases again, saying the market had been “surprisingly strong”.

Those forecasts gave the Government bad advice – and potentially caused it to delay urgent fixes to the housing market, allowing median house prices in the main centres to rise by tens of thousands of dolllars a month.

Given those terrible inaccuracies, Swarbrick and Willis want to look under the hood so to speak, by getting officials to come to the committee and explain how those forecasts work.

They’ve so far been blocked by Labour, which holds a majority on the committee. Chair Duncan Webb said Willis and Swarbrick are allowed to quiz Treasury in writing, but won’t allow them to haul officials before the committee for a full explanation. Webb says, correctly, that Treasury is often before the committee, but those regular appearances gloss over a wide variety of subjects rather than focusing on housing specifically.

Treasury has tried to explain itself by way of answers to written questions, but neither Swarbrick nor Willis are happy with its responses.

Treasury says that it uses its ordinary forecasting model for house prices, but it overlays this with “a degree of judgment”.

That doesn’t really help much. As Willis says, “a degree of judgment” opens up a whole lot of other questions. The committee has a right to demand whether that a large or a small degree of judgment was exercised by Treasury. A “degree of judgment” could mean anything between an analyst making a few small tweaks to numbers, and wholly uninformed economic reckons.

Both Swarbrick and Willis have political reasons for attacking the issue. The Greens think that if the Government spent more money, it wouldn’t rely on the Reserve Bank to prop up the economy with money printing. National wants to know what went into Treasury’s forecast that the Government’s most recent round of housing policies would cause house price rises to grind to a halt.

Treasury gave advice on those policies, then turned around and essentially marked its own homework, saying the policies would work to halt house price growth. National isn’t so sure – and if Treasury’s forecasts are the economic equivalent of a bad weather report, it will further their argument that the housing package isn’t all it’s cracked up to be.

Don’t expect the issue to go away soon. Swarbrick says she’ll push each week the committee meets for a proper briefing. If Treasury’s got the numbers wrong again, Labour’s denial of her request will begin to look obfuscationary, rather than just churlish.

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