Are the LVR restrictions riskier than meets the eye?

This time, David Grimmond discusses the loan-to-value speed limits that the RBNZ introduced from October 1 (Infometrics link).

David covers a range of concerns about LVR’s in his piece, however he is also concerned about whether having a central bank use such policies is appropriate and whether it is really a reasonable part of their mandate:

First rather than addressing the tax-related root cause to an excessive demand for home ownership it is trying to curb demand by introducing a new set of regulations. If you cannot change the tax rules then there may be some merit in a LVR scheme, but the result will invariably be worse than an approach that directly addresses the tax design issue.

The second issue relates to one of the political mandate for the LVR regulations.

Tax laws are determined by government and parliamentary votes.

If it is the political will to have a tax system that favours home ownership, what is the political mandate for a non-elected body like the Reserve Bank to introduce regulations to “protect” people from taking advantage of these tax rules?

Ultimately the Bank is imposing highly selective regulations that are limiting free choice and redistributing wealth across society.  These are the type of actions that normally require a political mandate, and it is not obvious that the Bank possesses this mandate.

Unlike the elected government, we do not have the recourse to vote out the Reserve Bank Governor at the next election if we are not happy with the Bank’s performance.

A very important point, and one a lot of economists out there (including the economists at the RBNZ) are puzzling over.