LVR rules only working at margins: Tuffley

ASB chief economist Nick Tuffley said the rules seemed to have had some success in improving financial stability but had not materially reduced the probability of a house price overshoot that would leave the market vulnerable to a sharp correction.

Banks have sharply reduced the amount of lending they do to borrowers with a deposit of less than 20% - something that the Reserve Bank had highlighted as a risk in the event of a downturn.

Tuffley said the Reserve Bank would likely see that change as a win for the rules that would encourage it to leave them in place a while longer.

“There’s been some success for financial stability through the shift in the mix of new lending if that situation continued over time, the composition of banks’ balance sheets would be less exposed to a crash in the property market so [the rules] have had some benefits. But in terms of reining in house price growth? The signs are a bit more equivocal.”

He noted that while housing turnover had eased in recent months, the impact on house prices had been muted. There were signs that house prices were peaking but there was likely some room left for growth yet, he said. “We’ve always taken the view that LVR rules’ impact will be at the margin and that looks to be the case.”

He said rising interest rates and – eventually – more construction would be the only drivers of a true change in the market.

ASB expects the Reserve Bank will increase the OCR this month, followed by a fairly gradual tightening cycle, reaching a peak of 4% by the end of 2015.

Comments from our readers

On 6 March 2014 at 10:02 am Jeff Royle said:

Totally agree, until supply is balanced we will have an increasing price market.

On 10 March 2014 at 8:48 am Richard said:

Whilst Auckland has the soul ripped out of it by cash rich Asian 'investors', the LVR has only helped destroy buying by kiwis in the outer suburbs and across the rest of NZ. The LVR has been a total failure and has only exposed the Reserve Bank's inability to even remotely understand the causes.

On 10 March 2014 at 11:50 am Amused said:

Agree with Richard's comment 100%. Treasury in fact called on the Government late last year to address the issue of non-resident purchasers inflating property values in Auckland but it seems no one in Government (or the Reserve Bank) is listening! We are currently the laughing stock of the Asia Pacific region on this subject. Allowing non-resident purchasers to own residential housing in your country is absolute madness when you already have a severe shortage of housing stock available i.e. Auckland. How are dumb are we as a country to allow this to continue?

The majority of countries in our region have already put in place restrictions on non-resident purchasers or banned them entirely from owning property having seen the inflationary impact had on their own housing markets. Why aren't we doing something similar here in New Zealand?

LVR restrictions have just made it even easier for ownership of residential housing in central Auckland to transfer to overseas hands. Well done Mr Wheeler!

LVR rules only working at margins: Tuffley

Loan-to-value restrictions haven’t done much to reduce the likelihood of a house price crash, one bank economist says.

Thursday, March 6th 2014, 6:00AM 3 Comments

Comments from our readers

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