Loan-to-income restrictions favoured

An economic think tank supports loan-to-income restrictions on borrowers rather than the LVR restraints imposed by the Reserve Bank.

Monday, July 7th 2014, 10:52AM

The NZ Institute of Economic Research says an idea floated by the Bank of England to manage financial stability would be better than the approach taken by the Reserve Bank in New Zealand.

"We like the Bank of England’s proposed restrictions on high loan-to-income (LTI) mortgages better than New Zealand’s LVR restrictions.” NZIER principal economist Kirdan Lees says.

“Restrictions on high loan to income mortgages directly address the risk that the Bank of England is worried about: that very high household debt could cause a sharp economic correction in the future.”

High LVR mortgages only tell you that house purchases are made without much collateral. But LVR restrictions do not take into account households’ long-term ability to service debt.

The Bank of England has a policy solution to a well-defined problem: stopping soaring household debt that sits at the heart of financial stability risks. Controlling house prices is not part of the Bank of England’s problem.

LVR restrictions will constrain risky lending, but the gains look to be limited and the policy carries some unintended consequences. We should look at LTI restrictions, as they are better targeted at the risk of financial instability created when many people cannot repay their debt.

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