Loan restrictions could help maintain stability: RBNZ
The current overheated housing market is a threat to future financial stability and the Reserve Bank is seriously considering the use of macro-prudential tools to help moderate house price inflation pressures.
Thursday, June 27th 2013, 11:15AM 
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Macro-prudential policy is intended to be used as needed, to reduce significant but transitory risks affecting the broad financial system.
“With some slack still in the economy, housing cannot yet be described as a threat to overall inflation. Higher interest rates are not the right policy response at this time,” Deputy Governor Grant Spencer said in a speech today to Business New Zealand.
While limited house supply is at the heart of the problem, strong demand supported by easy credit is underpinning the rapid escalation of house prices, Spencer said.
New mortgage approvals and loans have been growing at a faster rate and are now comparable with the pre-GFC peak levels.
“The new macro-prudential policy framework has been developed to address just this kind of macro-financial imbalance. The Reserve Bank is therefore seriously considering the use of macro-prudential policy,” he said.
The four potential macro-prudential instruments included in a Memorandum of Understanding between the Reserve Bank and the Minister of Finance all work in quite different ways to reduce financial system risk.
“Of the four instruments, the loan-to-value-ratio (LVR) instrument is the one with the best scope to dampen the current strong demand for housing, as well as reducing the risk to bank balance sheets,” Spencer said.
“While we believe that LVR restrictions could have significant benefits in terms of reducing systemic risk in the housing market, they are not a panacea.
We know that LVR restrictions could introduce market distortions. However, we need to assess inefficiencies against the potentially significant economic and financial damage that could result from a housing boom that ends in a severe housing downturn.
“While macro-prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term,” Mr Spencer said.
In the pre-GFC housing boom, with hindsight and with the macro-prudential framework we now have, we would most likely have applied macro-prudential instruments with the aim of reducing systemic risk. In the current situation, with house prices and household debt ratios starting from much higher levels, and with interest rates at historically low levels, the risks to financial stability may well be greater,” Spencer said.
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Comments from our readers
See below a recent blog from an Auckland land agent on this subject:
“It’s easy to play spot the kiwi in any auction in Auckland. It’s a bit like the game Where’s Wally, you have to look really hard and for a long time to find the stereotypical Caucasian kiwi family in the room."
"Oh yes the overseas investor is a big problem here I work in the field of real estate and I can tell you the PC spin that is going on now about denying that we have an overseas investor problem is a complete load of rubbish, the overseas investor is buying up most of our houses, especially the cheaper ones because they are so easy to rent out and make money off, our government should be ashamed of itself for allowing this and it is not just Asian buyers it is all overseas investors, they should at the very least have to pay a tax on their investment if the government won't tax our own citizens the very least they could do is tax the non-residents - though personally I would prefer it if you had to be a citizen or permanent resident to buy property here.”
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