After the most recent Financial Stability Review in New Zealand, Benje Patterson has decided to have a look into whether dairy farm debt really is a significant financial stability risk – and what this means for macroprudential policy (Infometrics link). His conclusion:
On balance, it seems that a sharp correction to both dairy and farm prices is an unlikely scenario at present. This conclusion implies that risks to financial stability are contained for now, but the Reserve Bank’s warnings regarding dairy sector debt still provide a prudent and balanced starting point for a discussion of risk. Even so, this does not mean the Bank’s comments should in any way be interpreted as a prelude to LVR restrictions in the dairy industry. The Reserve Bank knows full well that such restrictions could lead to inappropriate distortions to investment incentives and the ownership structures of farms would make dairy LVR restrictions unworkable in practice.
It is a risk that we must be mindful of, but there seems to be no sensible reason for loan-to-value restrictions for farmers (in any way of defining such restrictions). Do you agree?