4 Comments 4 Commentsby 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.
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