Dunne the cameo. Now for Reserve Bank reality

Another sparkling cameo on Friday and the curtain falling on a 30-year political performance, most likely for good. As we blink out of the political theatre into the dull winter daylight the Reserve Bank is grimly waiting.

Back in 1994 Peter Dunne’s ambition was to build a centre force. He oscillated between the two big power centres, twice in each side’s ministries. But even under MMP voters vote for or against a government (or make a statement against the governments on offer).

In 2011, under the National gerrymander which Judith Collins is determined to maintain, National’s Ohariu voters got John Key an add-on seat by voting Dunne in. If he had lost, taking out his one party-vote quota, Labour would have picked up that quota and so an additional seat.

With Dunne out of the way in 2014, Labour-Greens’ hopes would rise a small notch. To survive in office, National might need a gerrymander for Colin Craig or a dead-rat-swallow deal with Winston Peters.

That’s all entertaining. Back in the dull grey day-to-day the Reserve Bank and real issues lie in wait. Top of the list as the Bank has prepared this Thursday’s monetary policy statement have been house prices and the antics of its colleagues in big economies.

As a New Zealand Initiative report by Luke Malpass says, the main driver of higher house prices is that too few houses have been built to meet rising demand and “prices are absorbing the difference”. So, Malpass says, free up land on the periphery.

The risk in more sprawl was described by Edward Luce in Saturday’s Financial Times: in the United States the well-off are repopulating city centres while in the suburbs the less-and-less-well-off have to travel long distances to decent-paying jobs or settle for subsistence. Parts of Auckland already demonstrate that to some extent, which is partly why the Auckland Council and the government want some cheaper, smaller houses nearer the centre.

Demand is up because the population is bigger, households split up more and speculators and small investors pile in, safe from taxation on their income from capital gain. Houses give a higher return — yield — than bonds which are being kept especially low by the Reserve Bank and that in turn is forcing the Bank to use its refashioned “macroprudential” levers to discourage some lending on houses. In the latest ASB Bank investor survey rental property still rated as “the most popular asset class”, twice as popular as shares even after the Mighty River float.

This hunt for yield is the issue big-economy central banks are also wrestling with. After those central banks plunged their interest rates close to zero without stimulating “recovery”, they went in for “quantitative easing” (QE), that is, creating huge amounts of money which they showered on banks to try to get them lending and businesses borrowing to grow their economies.

At best, those economies have spluttered. The dosh has bought, not general prosperity — jobs and incomes — but higher prices for bonds, equities and property, that is, paper wealth. Along with that there has been a global search for yield. Because our interest rates are higher than elsewhere even though very low by our standards, our exchange rate has been driven up as foreign yield-hunters pile in.

The problem for the big-economy central banks, as New Zealand Initiative director Oliver Hartwich argues this week, is how to exit from QE without bringing the house down (so to speak).

The big one to watch is the United States Federal Reserve which has been doling out $US85 billion a month, with the aim of getting unemployment down to 6.5 per cent (it is still 1 per cent above that, despite a falling participation rate). When last month the Reserve began to hint it might stop, sharemarkets and global currency markets got in a tizz.

That tizz reached across to China and the other big “emerging” economies, which have been slowing. Australia has been feeling that through cuts to its commodity export prices. Business confidence there has tanked. That is bad news for this country.

The good news is that our exchange rate has fallen — from the stratosphere to the troposphere. The bad news in that is tradables inflation will rise, compounding already edgy non-tradables (domestic) inflation.

Too much of that bad news and the Reserve Bank will have to raise its official cash rate, which will be tough on people who have bought houses at too high a price and with too low a deposit. And if mortgage interest eats up money that might be spent on goods and services, that will not be good news for jobs — though that in turn would be good news for domestic inflation.

In any case, for now the house bubble is not translating into general inflation. So on Thursday the Reserve Bank will almost certainly leave its official cash rate at 2.50 per cent.

But for how long? The answer to that question is a serious matter for everybody. A micro-party leader’s misjudgments, by comparison, are light relief.