by Miriam Bell
ANZ chief economist Cameron Bagrie said that while the Reserve Bank did not announce any new macro-prudential measures in the Financial Stability Report (FSR) last week, it is a question of when, not if, they do.
“Housing is booming, speculative behaviour appears to be on the rise and households are leveraging - and this looks set to continue, given our analysis of some of the long-run drivers.”
Past experience indicates macro-prudential measures are not the most optimal policy outcome as they are distortionary and their effects are often temporary, he said.
“But the Reserve Bank looks set to take another crack via prudential means anyway…The rhetoric appears pretty clear - something is coming at some stage.
“All options appear to be on the table, but the way the Reserve Bank talked about debt-to-income ratios, a limit of that description looks a likely contender.”
Whatever the case, Bagrie doesn’t think we’ll have to wait too long to find out.
“Something within the next three months wouldn’t surprise us, though it may be a struggle to sell it politically as there will be concern over the impact on first home buyers.”
Other economists agree that macro-prudential measures directed at the housing market are on the way, but are less certain they will take the form of debt-to-income ratios.
ASB senior economist Jane Turner said further action is inevitable, but the Reserve Bank is waiting for more data to be confident in its assessment of housing market imbalances.
However, she thinks Auckland only LVR restrictions are likely to be on the Reserve Bank’s radar.
The Reserve Bank is fairly relaxed on regional house price lifts outside of Auckland, she said.
“It is confident that a supply response to increased regional demand would not be as hamstrung as we have seen in Auckland. Indeed, the Reserve Bank cited Tauranga’s per capita consent issuance is twice that of Auckland’s.”
For this reason, nationwide investor LVR measures may not be on the cards – rather any tightening of LVRs is likely to be confined to Auckland, Turner said.
“The RBNZ will also continue exploring loan-to-income (LTI) ratios, but the time frame for implementing these is much longer.”
For Westpac chief economist Dominick Stephens, the Reserve Bank didn’t give a strong sense of what any new macro-prudential measures might be.
Restricting bank lending by setting a maximum debt-servicing-to-income ratio is clearly one option being considered, he said.
“Although it is not without difficulties. For one, the Reserve Bank would need discuss the policy with the Treasury, as it’s not one of the options covered in its existing memorandum of understanding with the Minister of Finance.”
But further tweaks to the existing LVR rules or requiring banks to hold more capital against their lending are also avenues the Reserve Bank could chose to explore, he said.
“Whatever the case, we continue expect the Reserve Bank to announce some form of macro-prudential tightening before the year is out.”
Stephens added the Reserve Bank seems happy with the impact of lending restrictions to date.
That’s because it’s not house price growth they are worried about, but the potential consequences of the associated build-up in household debt, he said.
“To this end, lending restrictions to date have successfully reduced the share of high loan-to-value loans on the banks’ books.
“This means that in the event of a severe housing market downturn banks have a better chance of recouping what they lent.”
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