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RBNZ considers options to contain housing bubble

The Reserve Bank is still actively considering the use of loan-to-valuation ration (LVR) restrictions on housing lending to contain the next housing market boom.

Wednesday, February 8th 2012, 9:04AM 4 Comments

by Jenny Ruth

In its briefing to the incoming finance minister Bill English, the central bank says using LVR restrictions would require a change in the Reserve Bank Act and that if it did use such restrictions, it would do so in consultation with the minister.

"This is because these instruments are more intrusive in nature and could have broader economic consequences," the briefing says.

For example, LVR restrictions - such as allowing banks to lend no more than, say, 80% of a property's valuation - would have a bearing on matters like home affordability, the central bank says.

LVR restrictions have been widely used in Asia and now other countries, such as Sweden and Canada, are increasingly adopting them, it says.

"LVR restrictions can either be applied as a long-standing limit or 'switched on' during periods of rapid growth characterised by high LVR lending."

LVR caps could help promote greater resilience of the financial system by reducing riskier lending.

"They are also a highly visible and public way of signalling unease about the housing cycle and household debt," the central bank says.

However, the international evidence on their effectiveness as a stabilisation tool is mixed. "LVR caps have not prevented housing cycles in the countries that have used them but some countries believe they helped rein in the cycle to some degree," it says.

One limitation of LVR caps is their tendency to force lending to occur from institutions outside the financial system or for whom the LVR cap doesn't apply.

"This argues in favour of using such restrictions only when faced with a period of exceptional credit growth."

LVR caps "may be subject to avoidance issues unless enforced vigorously." In order to avoid such caps displacing credit growth to sectors other than the banks, "we might need to consider applying some instruments more widely than just the banks."

Central banks should worry about asset price inflation and housing in particular has been of special concern in the lead up to and following the global financial crisis (GFC)," the Reserve Bank says.

New Zealand banks' predominant risk exposures are to the local housing market and agriculture and experienced only limited loan losses through the GFC.

"We are alert to the possibility that the next crisis could impact these sectors in a more systematic way," it says.

The seeds of the GFC crisis were planted in the policy responses to past crises, in particular to the Asian crisis in 1997/98 and the bursting of the tech bubble, or "tech wreck," a couple of years later.

"If we are not careful, our responses to the current crisis could be laying the seeds of the next crisis," the Reserve Bank says.

« Kiwibank cuts. Just BNZ to goFalling rates stimulate greater interest in fixed-rate mortgages »

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Comments from our readers

On 8 February 2012 at 9:48 am Andy said:
Housing bubbles and cycles are simply caused by supply and demand - the very base of economics. Control the supply and demand, and the finance will take care of itself. Control immigration to control the demand. Build more houses to reduce over demand and keep prices down. Watch out in Christchurch as the demand for housing and land is going to sky-rocket, and prices accordingly - unless houses are provided quicker. There needs to be a program of fast and affordable, simple homes - one bathroom and toilet, 3 or 4 bedrooms on family sized land. Not every new home has to have a walk-in wardrobe and en-suite. Supply and demand will denote house prices and inflation, not LVR's, OCR's or fiscal retardation. Remember - a lot of small businesses are also leveraged off personal mortgages.
On 8 February 2012 at 10:54 am Brian Mearns said:
Why not simply stop the house prices rising by resolving the cause which is a shortage of houses? .By building sufficient homes and making them affordable by dramatically reducing the $90,000 per home the Councils needlessly add to the cost of subdividing and building 1 house there would be no house price boom as supply and demand would again be in balance.
On 8 February 2012 at 12:29 pm Your Vote said:
GFC or EQC crisis or legalized governmental monopoly compounded by communism. Where is that Government (Govt) that was set up to represent New Zealander.
On 15 February 2012 at 7:16 pm Patrick Rankin said:
If we start from the premise that The Govt. and particularly those that pull the strings, want the resultant economic state, we must then assume they are establishing tax systems that will encourage these results, so removing tax benefits previously enjoyed by real estate investors is designed to either 1) reduce the number of investors or 2) force the value of existing real estate up in either case it will slow development of more housing but will benefit the established investor community, whilst Joe the plumber has to put in more hours to pay his increased rent, bills and the attached increase in PAYE. For all to benefit it would be nice to find a balance after all Joe rents from you and I, if he misses a rent payment it hurts the bottom line, and of cause our peace of mind. Please talk to your legislator, tell them if the Govt. cannot build the housing required then be sensible and give us a fair go!!!
Commenting is closed

 

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Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.24 6.79 6.65
ANZ 8.64 7.84 7.39 7.25
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.24 6.79 6.65
ASB Bank 8.64 7.24 6.79 6.65
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
Bluestone 9.24 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Classic - 7.24 6.79 6.65
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.84 7.39 7.25
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 7.04 - -
Co-operative Bank - Owner Occ 8.40 7.24 6.79 6.65
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.74 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.69 6.45 6.19
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.75 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.79 7.39 7.25
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 8.25 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 7.25 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.75 7.35 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 ▼8.09 ▼7.59 ▼7.29
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 ▼9.09 ▼8.59 ▼8.29
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 7.84 7.45 7.25
SBS Bank Special - 7.24 6.85 6.65
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 6.74 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 8.04 7.55 7.45
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 7.24 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - - 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Westpac 8.64 7.89 7.49 7.25
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.29 6.89 6.65
Median 8.64 7.29 7.32 6.65

Last updated: 28 March 2024 9:42am

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