"Speed limits" or limitations on the amount of lending that banks can do in the high loan-to-value (LVR) range are tipped to be introduced by the Reserve Bank soon.
The move was one of several macroprudential tools the central bank was mulling, including counter-cyclical capital buffers and adjustments to core funding ratios, as well as sectoral capital requirements.
Massey University’s business students group held a forum yesterday to discuss monetary policy, with a panel of former Reserve Bank governor Don Brash, AMP chief economist Bevan Graham, acting head of economics at the Reserve Bank Tim Ng and Associate Professor David Tripe, the director of Massey’s centre for financial services and markets.
They were asked what the likely impact of macroprudential tools would be and what the strengths and weaknesses and alternatives were to LVR restrictions.
Graham said the Reserve Bank had to respond to the housing market in some way. “A big thing is to recognise that we haven’t used these tools in New Zealand yet. Evidence of how effective they are is pretty mixed. The focus is on loan-to-value restrictions but you see people thinking of ways to get around that. If the bank is genuine about stability then countercyclical buffers have a greater role to play.”
Brash agreed a change to banks’ funding requirements would be the best option – although banks would already have to hold more capital against their housing loans by September 30. “When a herd mentality develops… it’s very hard to see any interest rate dampening that down. The OCR got to 8.25% in 2007 but we still had a rapid increase in credit growth and house prices. Twenty per cent might do it but that would do huge damage to the rest of the economy.”
The risk was that rising house prices could result in a bust that would be very bad for economic stability, Tripe said. “The best protection is for banks to be more strongly capitalised so they are better protected individually against the failure of other banks.”
He said a change to core funding ratios would do that more effectively than LVR restrictions. “LVR restrictions might restrict some lending the banks undertake but won’t stop people who need loans with an LVR of less than 80%, they’ll still be able to bid for expensive properties. In Christchurch, most of the buyers probably have cash because they’ll have had a payout from EQC.”
LVR moves could be implemented quickly, Tripe said, but would likely have little effect on house prices. And he said if the banks knew that there was a deadline looming at which they would have to hold more capital, it would slow down their lending.
Ng said the tools were all just tweaks on the way to finding a final solution to housing affordability. He said that require a fix for supply constraints that were slowing down new houses.
