I see that there is political discussion about loan-to-value ratios. Both National and Labour have repeatedly said the RBNZ needs to do more about financial stability using its tools like LVRs (National signed an agreement with the Bank, Labour said it would bring them in as a tool), the RBNZ turns around and introduces loan-to-value speed limits because of the mess the Auckland housing market is finding itself in, then both political parties suggest that they don’t want the RBNZ doing anything. [Note: This isn’t necessarily a defence of LVR’s – this is more about the principle 😉 I discuss this quickly at the bottom]
Did we need a clearer indication that politicians just want someone else to blame, rather than having to face trade-offs directly. No we don’t, that is why I didn’t put a question mark there …
I’ll be blunt here – do any of the politicians talking have an understanding of the reasoning for the policy change? Or do they understand and have decided to be disingenuous? They seem like nice enough people, so I think they are just truly concerned about the impact on certain groups (a noble concern) – let us touch on the regulation issue briefly here to put government in context!
Wow, that is one of the least blunt “blunt” statements I could have written.
When we talk about an issue of “financial stability concerns” we are explicitly saying that individual banks will be taking on too much risk relative to what the “system as a whole” should be taking on. As a result, there is some sort of negative externality from said lending. Guess who the risky borrowers are (in terms of defaulting on a banks loan, especially following a aggregate decline in house prices), are they the property investors who either aren’t borrowing from the banks or already have significant equity … nope. Are they the people selling their old property and buying a new one with significant equity … nope. Are they the first home buyers, who are leveraging themselves up by putting down tiny deposits and crossing their fingers hoping house price keep going up … bingo!
Any regulation to deal this risk will have a significant impact on highly leveraged lending, which is what first-home buyers are – so the Reserve Bank can ignore their financial stability mandate, or they can respond to this. If you “take out” the change in financing options for first home buyers then you are “taking out” the financial stability gains as well …
Some may say that a bubble right now makes house prices expensive right now, thereby reducing affordability right now. However, why do we care if someone cannot afford to buy a house at this very second – couldn’t they just wait till the bubble is over?
However the concern here is that, New Zealanders that go out to buy a house during this bubble end up facing all the risk and expected drop in house prices associated with the bubble.
Generally these people are young New Zealanders who intend to start a family, and as a society we feel a bit rough about the fact they are in that position.
So the idea here is that we believe there is a housing bubble, however when it “pops” is uncertain, and as a result a new house buyer is really taking on “risk” rather than facing a certain depreciation when they take on the choice to buy. But my view was that:
Instead, we need to be honest about the transfer that may exist between current older homeowners and the young, and think about how the tax and transfer system can be made to deal with this. Admit the perceived unfair transfer that is taking place within society and deal with it directly.
This doesn’t sound anything like arbitrarily f’ing around with the RBNZ mandate and making it impossible to actually do the job they’ve been given in the Memorandum of Understanding on Macro-prudential policy. At the moment political parties want to loosen financial conditions for home owners, and introduce all sorts of schemes that will get capitalised into house prices. Instead, the politicians should be looking at it as a distributional issue – it isn’t about giving young households cheap large houses that only exist in fantasy, it is about being realistic about any intergenerational distribution issues that we believe exist due to the inherent “cause” of the current “bubble” or a broader “misalignment” – this has to be relative to what we think is “fair” around the distribution of lifetime resources. We can’t just “pop” a bubble, but if we understand the causes we can deal with the distributional issues associated with it. Looking at supply side constraints (which both parties are) makes sense – good to see that.
But what about the near term? Worst case scenario, one-off tax all property, given money to group who is “hard done by” – if you aren’t willing to do that, you are faking your belief in a distribution issue 😉
Now if you want some policy solution here, I’d reiterate it needs to be based on perceived causes, which would involve figuring those out and making a view. My personal view is completely different – I’m sick to death of people my age feeling comfortable taking on loans with deposits of 5-10% and then crying about the cost. I’m sick of hearing people whine about the idea of having to rent, and acting as if the costs that come with renting (which are real) are worth blowing a whole bunch of your lifetime earnings on by massively overpaying for a house.
Many moons ago I felt empathy about escalating housing costs until I actually looked at the HES figures about housing costs – now I don’t, and I’ve come to see this as an example of people wanting something for nothing. I do agree that Auckland is a special case, and the amount of uncertainty about what is going to happen up there is tough … but we can hardly say that is unrelated to policy right 😉 [Note: The next day Treasury released a paper on affordability, time to adjust my priors again? Don’t know, have to read it 🙂 ]
So I say hells yea, lets increase bank capital requirement related to housing loans – if that is where the systemic risk issue is seen to be, and that’s appropriate regulation, do it. The distributional stuff is the governments issue – and if you are another whining Gen Y person who feels hard done by, jump on Twitter and say something dumb about how much better it was in the 1950s or some rubbish. Preferably tag @TVHE in it so I can bathe in my generations inherent whining about everything – hey it has consumption value 🙂
Note: I’m not saying it is Gen Y specific – it is mid-20s to late-30s specific (so I guess I’m including Gen X – which indeed I am), people rally to causes that increase their own bargaining position, it just makes sense. All your other generations were just as bad – and I’m not trying to defend you from anything at all 😉
Note 2: In case someone reads this and starts blahing about vested interests, I don’t own any property, and I’m not completely heartless – I likely just calculate social welfare differently to you. That might sound heartless, but its more just nerdy.
Note 3: My preference would be for RBNZ policy to ensure the banks are holding sufficient capital/equity for their housing loans – rather than trying to ping a single factor related to the risk of individual borrowers. The point is the specific risk associated with a house price correction to the financial system, not to change the relative pricing of risk between the types of loans – this is why I noted I wasn’t defending LVR’s in of themselves, and part of the reason the Bank is using LVR instead of anything else is because it is a known quantity, while other policy tools don’t come with the institutional knowledge that banks and the RBNZ requires to do things quickly and effectively.
Update: Eric comments here. One thing I’d note is that the fact that equity holders are the first ones to be wiped out doesn’t necessarily get rid of the perceived issue of systemic risk – where the view is that banks aren’t taking into account the risk to other banks of them increasing their exposure to housing assets. Sounds like a pecuniary externality I know, which is part of the reason why I’m more willing to describe it than to fully defend it. I’d prefer to view it in a more general insurance framework with reference to LOLR and deposit insurance functions in the way I believe Eric is. Eric discusses more here.