LVR tinkering shows Reserve Bank not immune to lobbying, NZIER says
The Reserve Bank's exemption of new home building from low-equity mortgage limits, just two months after they were introduced, shows the central bank isn't immune to lobbying and highlights the limitations of such policies, says the NZ Institute of Economic Research.
The bank today amended its loan-to-value ratio speed limit policy, designed to limit the risk to the nation's financial stability from rising house prices, after lobbying by groups such as the Registered Master Builders Federation, which has argued that it had resulted in rising cancelled orders and a drop-off in inquiries.
Reserve Bank spokesman Mike Hannah said such groups had only flagged their concerns since the policy was introduced on Oct. 1 and hadn't raised it as a major issue in the first round of consultation. The exemption retro-actively applies from Oct. 1. NZIER principal economist Shamubeel Eaqub says overseas experience shows LVR-type policies require on-going "tinkering."
"Once LVR rules are started they are tinkered with incessantly" as regulators "manage all the workarounds that people put in place," Eaqub said. "It further impinges on the (Reserve Bank's) shield of independence."
Unlike a general interest rate increase, high LVR loan restrictions "are almost like a policy of exclusion", and make it harder for the central bank to maintain the appearance of independence and avoid the realm of politics, he said.
The LVR policy was meant to target people "taking on too much debt against property that is overvalued," he said. "By exempting new builds, does it reduce the risk or increase the risk?"
In October, governor Graeme Wheeler told Radio New Zealand that he didn't see a strong case for exempting new builds, a move that Finance Minister Bill English had suggested. The government is eager to kick-start residential construction in Auckland by creating a fast-track approval process and special housing zones.
Hannah said the central bank was required to consult the government under its macro-prudential memo but that it was clear under the memorandum of understanding that the bank implements policy independently. He confirmed the central bank had met with the Master Builders.
The exemption only applies to houses yet to be built, not those that are newly built. The bank said exempting low deposit lending on spec houses "would run a higher risk of generating distortions in the housing market, in the form of over-building or raising prices."
Deputy governor Grant Spencer said while high LVR construction lending only amounted to 1 percent of total home lending, it financed about 12 percent of residential building activity.
"This exemption will help to support the supply of new housing and, in doing so, reduce some of the pressure arising from excess demand in the New Zealand housing market," Spencer said.
Last month the Reserve Bank said it was too early to draw conclusions on the impact of its LVR restrictions although early indications were that they had tweaked lenders' behaviour.
Labour Party housing spokesman Phil Twyford said that Registered Master Builders Federation had argued that "lending limits were putting thousands of new builds at risk" and that "blew a hole in the government's policy of trying to increase housing supply."
Labour has said it will exempt first-home buyers form LVR lending limits, while imposing a capital gains tax on speculators.
Wheeler said in the bank's latest financial stability report that rising house prices in the past 18 months was "still the biggest risk to the stability of country's financial system."
A shortage of supply, particularly in Auckland and Christchurch, rising inbound migration and low interest rates are fuelling the property market, and the central bank aims to limit that growth with limits on the level of mortgage lending banks can write with less 20 percent of a property's value as a deposit, which came into force on Oct. 1.