The RBNZ announced LVR (loan to value) restrictions will start on 1 October 2013. It will limit high LVR (over 80%) to 10% of new lending. Matt has already written about this.
This post adds some data for context. The following figures are from the March 2013 quarter General Disclosure Statements, published on each bank’s website.
I was hesitant to write this post, until I realised I was writing it on a personal blog that only a few lovely people read and no-one will be too concerned with what I say 🙂 . Then I decided I may as well discuss how I actually feel about the speech from the RBNZ yesterday (where we discussed the summary here).
Not so long ago I wanted to note how to think about the causes of why we may move towards LVRs (maximum loan-to-value ratios on mortgage lending) in New Zealand. I noted the following in terms of some quotes they had made:
Either these quotes miscommunicate the justification the Bank is using for such policies, I have completely misinterpreted the quotes, or they communicate it perfectly and I fundamentally disagree with the association they are using.
It is now clear that the RBNZ’s communication is crystal clear, and I fundamentally disagree with an element of their justification for LVRs.
The RBNZ has now officially announced maximum loan-to-value ratios (LVRs) for the public in a speech here.
They noted that the run up in house prices has increased the probability of a sharp decline in house prices – an event that may in turn lead to instability in the New Zealand financial system. Their thinking is:
“The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.”
In this way it is pre-emptive – current credit growth is moderate, but they want to ensure they don’t lose control of credit growth in a way that makes the entire financial system (which is implicitly insured by government) fragile.
The Bank makes a specific point of saying that the concern is around mortgage borrowing, and a run up in house price expectations associated with already realised increases in house prices, that they are targeting with macro-prudential policy – as unlike an increase in the OCR which is targeted at broad demand, it is a specific lift in demand for housing that is driving current house price appreciation. It is not that NZ households have become more willing to spend per se – the concern is that NZ households, and the banks willingness to lend to households, is focused excessively on housing assets.
I will admit that I am not completely sold on the argument they have put forward for LVRs, and I’m perplexed at why they are communicating it by discussing house prices (thereby mixing it with issues of affordability for the public) rather than simply stating that they are of the view that banks are taking on too much risk in terms of mortgage assets at present.
But they have clearly laid out their argument, and they have made sure that they communicate it rather than just doing it. And this is great – I am alway impressed by how transparent our central bank is! I think that this helps them when it comes to introducing specific, one-off, policies such as the current LVR limts.
Though we rail against Government policies it is important to occasionally draw breath and realise how lucky we are! This reminder from Sebastian Edwards’ paper at an NZ Treasury conference on macro imbalances:
The way New Zealanders’ think about the economy reminds me of Woody Allen. In most of his movies, the main character (Woody himself) is depressed and a bit neurotic. He goes to the analyst twice a week and is unhappy about his life. However, as the viewer soon realizes, the whining is not fully justified. After all, Woody has a beautiful girlfriend—indeed, much prettier than a guy like him is likely to get—interesting friends, a nice apartment, and a well-paying job. Moreover, he lives in a charming neighborhood in Manhattan.
As Woody, many New Zealanders worry a lot. They worry about the economy and about the country’s position in the world. They are convinced that things are going downhill, and believe that the future looks rather bleak. And yet, by almost every possible metric New Zealand is a success: it is at the very top of the World Bank’s Doing Business ranking, according to the PISA test it has one of the strongest educational systems in the world, and Transparency International assures us that it is one of the least corrupt countries in the globe.
Aaron Schiff has an excellent post up on his blog, discussing why the NZ Inc idea can be a bit dangerous. I agree with him, and he has made a neat way of explaining it more clearly than I could have:
Think about it from a personal perspective. Imagine I was offered a high paying job in a new city. From an “Aaron Inc” perspective I might choose to take the job if it pays well. But what about the effects on my family, my quality of life, etc? “Aaron Inc” would lead to bad decisions overall, and I doubt anyone makes personal decisions solely on that basis, so why should a country?
The idea here is if we were just willing to focus on our income when making decisions, we end up missing out on all the other things we value – and ignoring that there are often trade-offs involved, such as between working harder/longer and enjoying more personal leisure time!
After giving it some thought, I would stretch the Aaron analogy a bit further though. Read more
FYI: Rant – although I’ll try to make sure I write slowly and clearly, as it is an issue I want to be considered on but have to intrinsically include my moral views to such a degree it is a rant 🙂
Now I am relying on a news story, so potentially the actual pressure on doctors will not be such that they are “encouraged to question unemployed patients on their career goals”. Furthermore we may not see incentive schemes that involve “rewarding doctors who get their patients off the benefit” (Note: My impression is that this is the old “sickness beneficiary” patients that are being discussed here). If we are not going to see these things occurring then that is good – and my post doesn’t need to be seen as an attack on the current government.
But if this is in fact in the pipeline, then either the current government is not utilitarian (whereby I’m taking that as maximising some form of social welfare function), or as a society “we” have a much more bitter and twisted view about beneficiaries than I had previously realised. This is reinforced by the strange comments towards the end of the article such as:
“It is currently an inhibitor – a source of contention that gives the GP a perverse incentive to advocate for the client,” they said.
And:
International research has shown consequences from being out of work include poorer mental and physical health, increased rates of mortality, and risk of cardiovascular disease, lung cancer and respiratory infections.
While the first quote is relevant, you may wonder why I picked the second. Read more
