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.
Over on VoxEu Charles Manski makes the case that deadweight loss is merely anti-tax rhetoric, and it should be thrown out of economic discourse!
I actually agree with what he is saying regarding analysis – that economists need to, where possible, look at tax and spending decisions simultaneously. This implies that when we cost-benefit government projects, the implied cost of taxation needs to be explicitly taken into account. I don’t think you’ll find anyone who disagrees.
But I don’t think DWL should go. Read more
Shamubeel asked yesterday why the Government is asked to fix every perceived problem. As inspiration for his forthcoming post I present the latest initiative from a city councillor in Essex:
A council is considering urging taxi firms to provide cheaper cab fares for women who wear revealing clothes.
Brentwood Borough Council is considering the bizarre move in a bid to stop women wearing short skirts or low-cut tops becoming a target for sex attackers.
The council is considering discounted taxi prices so that ‘provocatively dressed’ women can be driven back home and have less of a problem getting a ride.
I have a feeling that he hasn’t really thought through the incentives it would provide.
