Central banks should not target house prices

The idea has won support, especially in New Zealand, but there are better ways to make housing more affordable

Robin Harding 

    © James Ferguson


The worldwide fall in interest rates over the past two decades has caused a runaway boom in house prices. 

Therefore, it makes sense to raise interest rates so houses become affordable again. 

The first of these statements is almost certainly true — but the second does not follow. 

It would in fact be a disastrous mistake.

New Zealand’s government recently told its central bank to consider the impact on housing when it sets monetary policy. 

The Reserve Bank of New Zealand rebelled and said it will do no such thing, but as people across the world struggle to afford a house, there was a wave of sympathy for the idea. 

To see why the RBNZ was correct, however, consider what would happen if a central bank tried to target house prices.

A fall in interest rates makes a given flow of rent (if a property is let out) or accommodation (if it is owner occupied) more valuable. 

Owners discount that cash flow using the risk-free rate, so there is little doubt that the proximate cause of rising house prices in many countries over the past couple of decades is cheaper money. 

If lower interest rates made house prices go up, then quite logically, higher interest rates will make them go down again.

But central banks did not cut interest rates to zero and launch massive programmes of asset purchases out of some perverted desire to raise house prices. 

They did so because they judged it essential to meeting their mandates of stable prices and full employment. 

If they tried to stabilise house prices instead, by how much would they have to raise interest rates?

The answer is: a lot. 

The economists Òscar Jordà, Moritz Schularick, and Alan Taylor studied the sensitivity of house prices to interest rates across 14 countries and 140 years of history. 

They found that a 1 per cent rise in interest rates reduces the ratio of house prices to incomes by about 4 per cent. In New Zealand, for example, that ratio has risen by about half in a decade, implying a double-digit rise in interest rates to stabilise it.

If that seems too abstract or implausible, then imagine simply keeping interest rates at New Zealand’s 2000-09 average of 6 per cent, instead of the current 0.25 per cent. 

Any advanced country following such a policy during the past decade would have experienced massive currency appreciation, slumping investment and a collapse in exports. 

That would translate to lower growth, weaker incomes, high unemployment and quite possibly a spiral into deflation.

What if interest rates were just a little bit higher? 

Then house prices would not be noticeably lower and there would still be some extra unemployment. 

Anybody arguing for higher interest rates to control house prices should explain why this is a good trade-off — or at least acknowledge that the trade-off exists.

Hiking interest rates would cause a lot of collateral damage to the economy. 

But it would not in fact do much to help younger people struggling to get on the housing ladder.

Consider four individuals. 

First, a young worker made unemployed by higher interest rates is more likely to lose their home than to buy one. 

Second, a young buyer relying mainly on debt to buy a house will find the cost of a mortgage has gone up roughly in proportion to the falling price of the asset.

Third, there should be a group of more comfortable buyers — young professionals, perhaps — who find the overall reduction in demand has made homes more affordable. 

But the real beneficiaries would be in group four: savers with money in the bank. 

They would get a nice, high interest rate without having to take any risk. 

Far from being a policy that helped young people struggling to own a home, the main winners would be old and prosperous.

Higher interest rates would bring down house prices by suppressing demand across the whole economy. 

If this is really what people want, one could get a more targeted result by putting a tax on houses, and using the proceeds to cut income tax. 

For example, a tax on property values of 3 per cent a year would bring down house prices even more effectively than a 3 percentage point rise in interest rates, because existing homeowners would have to pay as well. 

For that reason, of course, such a tax is political poison.

Another option is to target particular groups of buyers, as New Zealand is doing now by cutting mortgage interest relief for landlords. 

That reduces investment demand. 

Governments can also tax foreign owners, to limit buying from abroad, or regulators can require bigger deposits, to cut off the marginal first-time buyer. 

Setting higher loan-to-value ratios may be wise and necessary for financial stability reasons, although that is a separate matter to housing affordability.

Fundamentally, all of these policy ideas — higher interest rates, taxes, or restrictions of various kinds — are about reducing demand for housing. 

But how does suppressing demand for something people want make us better off? 

When demand for something rises, the only sane, logical, sustainable, free market response is to make more of it.

The politics may be uglier than blaming central banks, but for New Zealand and other countries wrestling with expensive housing, there is only one real answer: tackle nimbyism, cut planning regulations and let people build more houses. 

Venezuela Passes a Security Test, for Now

Caracas can’t allow fighting among Colombian guerrilla groups to rage on inside its borders.

By: Allison Fedirka


Venezuelan soldiers started flooding into Apure, a state along the border with Colombia, just over two weeks ago. 

The deployments aimed to tamp down fighting among guerrilla groups from Colombia and regain control. 

The operations have so far destroyed at least nine guerrilla camps and resulted in dozens of detentions and dozens of deaths, including eight dead Venezuelan soldiers. 

Though the fighting seems to have quieted down for the moment, the strong military presence is likely to continue in the short term. 

The Venezuelan government will allow – even encourage – some degree of illicit activity by Colombian guerrilla groups on its territory. 

The spoils from such activities help to keep its military in line. 

But at a time when its authority is already being seriously questioned, Caracas can’t allow fighting among the guerrilla groups to rage on inside its borders.

Fractured Alliance

What’s unique about this wave of border violence is that the Venezuelan authorities are responding at all. 

Normally, the government turns a blind eye to activities by former Revolutionary Armed Forces of Colombia (FARC) or National Liberation Army (ELN) guerrillas in hard-to-govern parts of the country like Apure. 

In fact, over the past few decades the Venezuelan government has preferred to work with guerrilla and criminal groups in the border area to advance common interests. 

Ideologically, the FARC had much in common with the late Venezuelan President Hugo Chavez and his Bolivarian Revolution. 

Both championed revolutionary socialism, and both were hostile to the Colombian government. 

The Venezuelan government sheltered the FARC from Colombian security forces, and in return it gained leverage over the Colombian government. 

Over time their shared political interests grew to include economic and security interests as well.

But what’s left of the FARC is not the same as the FARC of the early years. 

After more than 50 years of fighting and multiple failed peace talks, the Colombian government and the FARC finally signed a peace deal in 2016. 

Many FARC fighters, however, refused to put down their weapons, preferring to continue participating in the lucrative drug trade, fuel smuggling and illegal mining. 


The remnants of the group tried to reconstitute it in 2017. 

By mid-2019, two distinct factions were jostling for position along the Venezuelan border. 

One is called Second Marquetalia (sometimes referred to as New Marquetalia) and is led by Jesus Santrich and Ivan Marquez, a former member of the FARC Secretariat and the group’s second-in-command at the time of its demobilization. 

Second Marquetalia consists of multiple “fronts” and runs operations primarily in Colombia’s Caribbean region as well as northern Antioquia and parts of the Venezuelan border. 

The other faction, sometimes called the 1st Front Dissidence, also consists of multiple fronts and is led by Ivan Mordisco and Gentil Duarte and operates primarily in eastern Colombia.

The leaders of both groups aspire to unite the factions, but neither side is willing to submit to the other. 

Yet they did manage to come to an understanding for a while, through an agreement that also involved the ELN, a long-standing player along the border, and the Venezuelan government. 

Eventually, however, their accord broke down because of disputes over the distribution of income and territory. Based on the recent Venezuelan operations, it appears Marquez and Santrich’s Second Marquetalia has come out on top, due in large part to its ability to keep the ELN and the Venezuelan government on its side

Necessary Evil

The Maduro government has been working for months to stop or contain the escalation of fighting between the ex-FARC factions. 

In September 2020, Venezuelan forces attacked three camps belonging to the 10th front – part of the Mordisco-Duarte faction – in three sectors of Paez municipality in Apure state. 

At the end of January – a day after reported skirmishes between the two factions – the armed forces launched another operation, code named Jiwi 2021, against dissident FARC camps in Venezuela. 

Less than a week later, on Feb. 5, participants in Jiwi 2021 clashed with FARC elements near Puerto Ayacucho in Amazonas state. 

A third operation occurred Feb. 11 in the Pedro Camejo municipality of Apure state, during which eight guerrilla camps were destroyed as well as eight runways used by drug traffickers. 

In all of this fighting, including the most recent bout beginning March 21, the Venezuelan government has carefully chosen its words in describing its targets. 

Reports indicate that the target group is the 10th front and affiliated members – all part of the Mordisco-Duarte faction. 

Presumably, Caracas wants a return to the original framework led by Marquez and Santrich, thus preserving the relationship among the Venezuelan forces, the ELN and Second Marquetalia.

The government’s strong response reveals the scale of the threat that the infighting poses to the Maduro regime. 

The Chavez regime laid the foundation for strong ties between the government, the security forces and Colombian guerrillas like the FARC and ELN. 

Over the years, these parties have engaged in mutually beneficial black market activities. 

These activities in turn have become critical to the Maduro regime, which takes its share of the revenues and stays in the military’s good graces by letting it do the same. 

The nexus between these groups would be difficult to map out precisely, but there was enough evidence for the U.S. Justice Department in March 2020 to indict Maduro, several current and former Venezuelan officials, and members of the FARC’s leadership on narco-terrorism charges.

Besides the need to keep the money flowing, Caracas must use this moment to prove it can control its territory. 

The recent offensive comes as the public is seriously questioning, if not outright rejecting, the legitimacy of the regime. 

The economic situation in the country is precarious, and there have been multiple attempts – by regime critics and the U.S. – to sow divisions within the military’s ranks. 

The territory in question is remote and difficult to secure, but if the government fails to rein in the problematic FARC faction and show it can maintain control, it would severely damage the credibility of the government and the military. 

(Arguably, the fact that the government and military depend on relationships with foreign guerrillas and criminal gangs in the first place is evidence enough of a lack of government control, but an acceptance of criminal activity is not quite the same as anarchy.)


To that end, Defense Minister Vladimir Padrino Lopez announced on April 5 the creation of special defense operation zones in three municipalities of Apure state. 

The government also sent in the Special Action Force of the Bolivarian National Police (FAES), which human rights groups consider to be a death squad. 

The mission of the FAES is unknown, but it likely includes intelligence collection, supporting the other forces, serving as the eyes and ears of Miraflores Palace, and of course brutal suppression. 

The heavy-handed response is proportionate to the risk the Maduro regime seeks to eliminate.

The Bigger Picture

All this instability serves the interest of the U.S. and Colombian governments. 

Indeed, on several occasions the Maduro government has claimed without evidence that Washington and Bogota are behind the fighting. 

However, U.S. efforts to usher in regime change have flopped. 

Washington failed to inspire civil-military action in early 2019, when opposition figure Juan Guaido claimed the title of interim president, and sanctions have weakened the regime but have not brought it down. 

Neither the U.S. nor Colombia has the political or economic capital to support a military offensive to depose Maduro, nor is it necessarily in their interest for the country to slide into civil war, or descend far enough into chaos that the U.S. felt a need to get involved militarily. 

The potential for the struggle within the remnants of the FARC to weaken the regime by eroding confidence and exposing fissures between the government and the armed forces is the best scenario for regime change outside of the recent U.S. efforts.

For now, it appears the Maduro regime and the Venezuelan armed forces have regained control of the territory and settled the dispute between the ex-FARC groups. 

But if attacks by the FARC groups resume, in Venezuela or Colombia, it could indicate an unraveling of the status quo and trouble for the regime. 

Another sign of trouble would be if Russia, which has a vested interest in the Maduro regime’s survival, increased its support, particularly militarily. 

Finally, Colombia’s response must be monitored. 

To date, the Colombian government has sent some military reinforcements to areas where people fleeing the violence have crossed the border, but it has steered clear of direct intervention. 

Any moves by the guerrillas or missteps by the Venezuelan military into Colombia that necessitate a response from Bogota could also upset the balance.

The Mysterious Aftermath of Infections

“Long Covid” is just the latest example of a pathogen causing surprising persistent effects.

By Roxanne Khamsi

Credit...Tyler Comrie


In 2000, the small farming town of Walkerton, Ontario, suddenly became known to scientists around the world.

During the second week of May that year, the town, about 115 miles northwest of Toronto, got more than five inches of rain. 

Bacteria from manure on a farm was carried by runoff to a nearby well. 

Public utilities operators failed to appropriately monitor the water supply or to quickly advise the town how to ward off contamination, a government inquiry later concluded.

Without that information, Walkerton residents continued to drink the water, and more than 2,300 people became sick. 

Twenty-four children experienced severe kidney damage that occurred after the gastrointestinal symptoms subsided. 

Seven people died.

The culprits turned out to be a particularly dangerous strain of E. coli and Campylobacter jejuni bacteria, both known to cause stomach cramps and diarrhea. 

Yet even after the source of the outbreak was identified, the health disaster did not end.

In the years that followed, doctors saw more people in the town suffering from problems such as chronic fatigue, neurological damage and arthritis. 

A study of the children in Walkerton treated for kidney damage conducted five years later found that a few had slightly elevated protein levels in their urine, suggesting that their kidneys had not fully recovered.

The Walkerton outbreak was an early and substantive step forward as researchers build our understanding that pathogens can cause harm well beyond their initial attack.

Now, with the coronavirus pandemic, we are seeing more proof that an infection can cause lasting damage. 

What scientists want to understand is, with the coronavirus and other pathogens, when do the infections end and longer-term illnesses begin? 

There’s a tremendous amount of mystery.

Solving that mystery will help scientists better understand the wide-ranging complications from Covid-19, including the lingering effects known as “long Covid.” 

Studies have found that even some people with mild Covid-19 developed lung damage, for example. 

Autopsies have detected the coronavirus in heart tissue, and there is concern about lasting cardiovascular damage in survivors. 

Long Covid, which recently received the scientific name “post-acute sequelae of SARS-CoV-2 infection,” may have links to problems including severe fatigue and memory lapses.

Scientists have linked many infections to seemingly disparate ailments that crop up later. 

They’ve known for many years that an untreated case of strep throat, caused by streptococcal bacteria, can lead to a type of heart disease. 

More examples have piled up through the decades: Lyme disease can cause a form of arthritis. 

The bacterium Helicobacter pylori can produce ulcers and stomach cancer. 

Some strains of human papillomavirus can cause cervical, anal and throat cancer.

Medicine has begun only to scratch the surface of how infectious diseases can cause damage far beyond the initial symptoms. 

One well-established complication of a bacterial or viral infection is Guillain-Barré syndrome, an immune reaction against the body’s nervous system that can cause weakness and, in some cases, paralysis.

Most people recover fully, but by some estimates it is fatal in around one in 20 cases.

One potential explanation for Guillain-Barré syndrome — which could apply to other complications — might have to do with a phenomenon called “molecular mimicry,” said Dr. Prathit Kulkarni, an infectious diseases specialist at the Baylor College of Medicine. 

If the pathogen’s proteins are similar in shape to those found in the human body, antibodies might accidentally react against a person’s own organs, Dr. Kulkarni explains.

In addition to turning the body’s immune system against itself, a microbe can cause direct and irreparable tissue injury or ignite damaging inflammation, which could account for later illness and persistent symptoms.

Parsing these connections is tricky, in no small part because a virus or bacterium may no longer be in the body even though its reverberations linger. 

“By the time you’re caring for the person, the pathogen is long gone, it’s just that it’s initiated this cascade of immune-mediated damage,” said Dr. David Fisman of the University of Toronto’s Dalla Lana School of Public Health.

In the case of Covid-19, researchers have many different theories about what might cause lingering illness. 

One idea is that the coronavirus itself directly damages tissues by killing cells, and affected organs never recover. 

Another idea is that the virus prompts inflammation that indirectly causes harm to organs. 

Some researchers suggest that long Covid sufferers might harbor a reservoir of the coronavirus. 

They have speculated that the Covid-19 vaccine might spur an immune response that eliminates these reservoirs, which might explain why some people with long Covid report feeling better after vaccination.

Addressing the gaps in understanding complications that arise from infectious diseases will take time and dedication. 

For starters, the medical community needs to establish a clearer consensus on what these complications are for specific infectious diseases, according to Dr. Anneli Lauhio, a specialist in infectious diseases in Finland who has studied the morbidity caused by these illnesses. 

Doing so through large-scale studies, she said, “will change medicine a lot,” and help doctors identify these complications earlier and treat them.

We are starting to see strides in this direction. 

The U.S. National Institutes of Health has allocated $1.15 billion in funding for research into the prolonged health consequences of SARS-CoV-2 infection. 

Part of this effort will include large studies involving electronic health records, to capture a broad amount of data over time. 

Similarly, researchers in England and Australia created a global registry that will collect information about cases of newly diagnosed diabetes following Covid-19; some have suggested the infection elevates diabetes risk.

There are examples of promising studies to uncover the hidden repercussions of infection beyond Covid-19, too. 

Dr. Shannon Majowicz, a University of Waterloo epidemiologist and her collaborators have set up a new study to analyze 10 years of past data from medical databases to estimate the health burden — including possible long-term autoimmune or chronic inflammatory complications — of 14 infections commonly transmitted by food in British Columbia.

Scientists are better equipped nowadays to study post-acute complications of infectious diseases. 

Rapid genetic sequencing to find previously hard-to-detect viruses and bacteria is more readily available, and electronic health records make it easier to track people. 

With tools like these, it becomes possible to see the actual toll of infectious diseases beyond their acute symptoms. 

This information can help doctors better anticipate and treat complications.

Last May, because of the pandemic, the town of Walkerton had to cancel plans to commemorate the 2000 E. coli outbreak and its victims. 

All of the medical aftershocks of the water contamination two decades ago are still not understood. 

As with the current pandemic, the scientific work needed to understand the repercussions of infections continues even after an outbreak is declared “over.”


Roxanne Khamsi is a science journalist covering Covid-19.

The Post-Pandemic Safety Net

The coronavirus pandemic has sparked a rebirth of Keynesianism and the welfare state in Western Europe, Japan, Canada, and parts of Latin America, and changed the terms of US debate in ways that previously seemed almost unthinkable. Three examples show how the narrative is changing.

Jorge G. Castañeda


MEXICO CITY – With the United States beset by the COVID-19 pandemic, a deep economic recession, and heightened racial tensions, many observers predicted – some in hope, others resignedly – that the 2020 elections would bring about a significant change in the country’s social contract. 

Fortunately, they appear to have been right. 

Proposals to strengthen the welfare state and social safety nets have gone mainstream – and not only in America.

I argued back in May 2019 that America was ready for a more robust welfare state. 

And well before the pandemic began, the platforms and promises of many of the Democratic presidential candidates – including Elizabeth Warren and Bernie Sanders on the party’s left, centrists such as Joe Biden and Andrew Yang, and Michael Bloomberg on the right – suggested a marked shift to the left on many issues.

They advocated universal health care and childcare, free public higher education, and higher pensions and unemployment payments. 

A $15-per-hour minimum wage, non-property wealth taxes, universal basic income, and child support were on the agenda, too. 

Several candidates also pledged to fight systemic racism in housing and the justice system, introduce a Green New Deal, and even guarantee a federal government job to anyone who sought one.

Most commentators doubted that any of these proposals would gain traction in the presidential election campaign or even under a Democratic administration. 

Although many people wanted a new American welfare state, nearly everyone was skeptical that it would come about.

But the pandemic has sparked a rebirth of Keynesianism and the welfare state in Western Europe, Japan, Canada, and parts of Latin America, and changed the terms of US debate in ways that previously seemed almost unthinkable. 

Governments have spent an estimated $13.8 trillion, or 13.5% of global GDP, to counter the pandemic’s effects, including enormous sums for health, furlough payments, small businesses, women, and children.

At first, policymakers regarded much of this spending as a temporary necessity until COVID-19 vaccines became available. 

But, as the health and economic crises dragged on, it became increasingly apparent that many of these provisional measures would either become permanent, or trigger a major global debate about the need for a new kind of welfare state.

Three examples show how the narrative is changing. 

The first is President Biden’s $1.9 trillion American Rescue Plan, which Congress approved in March. 

As its name suggests, this is not a long-term, strategic package aimed at rebuilding the US and its dilapidated and dysfunctional social safety net. But it includes several possible ingredients of one.

The most important are Biden’s changes to the child tax credit, which could become the US equivalent of the French allocation familiale or the Canada child benefit. 

While the Biden plan provides funding only for one year of the new benefit, he and congressional Democrats are seeking to make it permanent.

In contrast to the universal French and Canadian schemes, Biden’s child tax credit is a means-tested benefit. 

Nonetheless, the new measure raises the maximum benefit most US families will receive by up to 80% per child, and extends it to millions of families who don’t earn enough to qualify under existing law. 

More than 93% of American children – 69 million – will receive benefits. 

According to some projections, the new benefit could reduce US child poverty by 45% overall, and by 50% among African-Americans. 

The Biden plan also almost doubles the tax credit for childcare, bringing it to approximately $100 billion per year.

A second telling indicator is that the influential and traditionally free-market British weekly The Economist recently devoted its cover, an editorial, and a long briefing to the rebirth of the welfare state. 

Although the magazine questioned the wisdom of some countries’ policies and suggested a series of reforms to European welfare states, it clearly acknowledged the need for a sweeping overhaul or reconstruction of most rich countries’ social safety nets. 

Moreover, The Economist recognized the logic of deficit spending at a time of near-zero interest rates and deep recessions almost everywhere, and even noted the growing popularity of universal basic income.

The third example comes from Latin America, where it was increasingly apparent even before the pandemic that narrow, tattered, and expensive safety nets – weakened by large budget cuts – were fueling unrest and discontent. 

The large protests in Chile in October and November 2019, for example, reflected anger at deficient health care, low wages and pensions, and exorbitantly expensive higher education.

Likewise, Mexican voters in 2018 overwhelmingly rejected the two parties that had governed the country since the advent of democratic rule. 

Instead, they elected as president Andrés Manuel López Obrador, a populist left-wing rabble-rouser who appeals to citizens’ understandable resentment of high inequality, atrocious social services, mediocre schools, and an enormous informal economy that excludes half the population from the social safety net.

Last August, the United Nations Development Programme’s Latin American division began sponsoring a series of virtual meetings on the (re)construction of welfare states in the Americas, the pandemic’s impact on the safety net, and the fiscal implications of redefining social protection. 

To address these issues, the UNDP’s regional director, Luis Felipe López-Calva, former Chilean Senator Carlos Ominami, Mexican author Héctor Aguilar Camín, Sciences Po’s Gaspard Estrada, and I convened a group of left-of-center politicians and intellectuals from several Latin American countries and the US, including government officials and opposition leaders. 

The fact that these discussions about forging a new welfare state are taking place at all is highly significant and attests to the issue’s region-wide salience.

The road to a stronger welfare state remains long and winding, especially for the US and Latin America. 

But what happens in America often quickly spreads to the rest of the world, for better or worse – and the recent reinforcement of its social safety net is unquestionably a welcome outcome.


Jorge G. Castañeda, a former foreign minister of Mexico, is a professor at New York University and author of America Through Foreign Eyes.