ASB chief economist Nick Tuffley said the rules seemed to have had some success in improving financial stability but had not materially reduced the probability of a house price overshoot that would leave the market vulnerable to a sharp correction.
Banks have sharply reduced the amount of lending they do to borrowers with a deposit of less than 20% - something that the Reserve Bank had highlighted as a risk in the event of a downturn.
Tuffley said the Reserve Bank would likely see that change as a win for the rules that would encourage it to leave them in place a while longer.
“There’s been some success for financial stability through the shift in the mix of new lending if that situation continued over time, the composition of banks’ balance sheets would be less exposed to a crash in the property market so [the rules] have had some benefits. But in terms of reining in house price growth? The signs are a bit more equivocal.”
He noted that while housing turnover had eased in recent months, the impact on house prices had been muted. There were signs that house prices were peaking but there was likely some room left for growth yet, he said. “We’ve always taken the view that LVR rules’ impact will be at the margin and that looks to be the case.”
He said rising interest rates and – eventually – more construction would be the only drivers of a true change in the market.
ASB expects the Reserve Bank will increase the OCR this month, followed by a fairly gradual tightening cycle, reaching a peak of 4% by the end of 2015.
