LVR restrictions: exempting new construction
The RBNZ today exempted new home builds from high loan to value restrictions.
The reason for putting the policy in place is financial stability. That is to reduce the accumulation of high-risk debt in the banking system. By this test, and this should be the reasonable test, this is bad policy.
By this exemption the RBNZ is saying that it is less risky to borrow to build a new house than to buy an existing house. I disagree that new house prices move less than existing house prices. So, the RBNZ is now exercising a policy of exclusion – against those high LVR borrowers who want to buy existing homes.
The justification that we need to build more houses, surely is retorted with, is this the right policy to address that problem? It also raises the question of why was this not a consideration before the LVR policy was implemented? What did the RBNZ actually know about how high LVR loans were being used, by whom and where?
By increasing highly leveraged credit flow to new builds will not solve issues to slow land release and planning restrictions.
By seemingly bending to industry and political pressure, the RBNZ has tarnished its shield of independence. I am fearful of ongoing lobbying and political interference it invites heading into the 2014 election.
I’m surprised RBNZ hadn’t tried to deflect the criticisms onto the building industry, councils etc, more.
That new housing relies so strongly on such lending must be a sign that building costs are too high.
They have put the acid on councils to some degree, indeed probably more than is warranted on their part. This policy is supposedly about the risk to financial stability from a collapse in house prices; high house prices are only at risk of collapse to the extent that they’re a product of excessive demand; and if demand is excessive then you don’t really want supply to match it (see: Spain, Ireland).
“What did the RBNZ actually know about how high LVR loans were being used, by whom and where?”
This policy has always had a “Yes Minister” vibe about it. Something must be done about the housing market; this is something; therefore we must do it.
In their defence, though, I think you’re overplaying the independence card. Digging in your heels against all evidence to the contrary does not equate to independence, nor does it give people confidence that you can be trusted with such independence. The Reserve Bank listened to informed advice that the policy as it stood was not having the desired outcomes, and they changed it. Making a bad policy less bad is still an improvement.
Unless, of course, you’re suggesting that they’ve been played by the Master Builders Federation and some shonky research. But then let’s see the counter-evidence.
I like the “yes minister’ comment. It definitely has a feel of that.
I hope you are right that my fears on independence and transparency are misplaced – because they are very important and necessary aspects of the RBNZ.
I dont know how the RBNZ could have known the impact of the LVR restrictions in the first two months, when the initial impact was going to be large. But the bigger issue I have is not that it will have an impact on new building, rather how it fits with the most important reason and test for this policy: financial stability.