There have not been many instances in the past decade or so where economic policy changes in New Zealand have presented a template or lead for Australia. After all, New Zealand is only just recovering from a recession that Australia never experienced, it’s per capita GDP is more than 40 per cent lower than in Australia and it has net government debt at 36 per cent of GDP compared with Australia’s 12 per cent.
Confronted by an uncomfortable house price surge at a time when the economy is only just gaining a foothold after the recession and when the New Zealand dollar is significantly overvalued, the Reserve Bank of New Zealand has a dilemma. It clearly is reluctant to hike interest rates as this would obviously risk choking off growth and reflating the Kiwi dollar, but it needs to stifle housing demand as the house price surge is threatening to become a troublesome bubble.
In a valiant effort to tackle this dilemma, the New Zealand central bank has announced a regulatory change for new mortgages in a move that is designed to limit leveraged lending for housing. This housing-specific policy is designed to contain the house price bubble without inflicting collateral damage to the rest of the economy.
Reserve Bank of New Zealand Governor Graeme Wheeler announced yesterday that from 1 October 2013, New Zealand’s banks would be required to limit their new residential mortgage lending at loan to valuation ratios of over 80 per cent to a maximum of 10 per cent of the value of their new lending levels.
In other words, the regulatory change effectively means that only 10 per cent of new loans written are allowed to have a loan to valuation ratio over more than 80 per cent.
In terms of some of the details, the seasonal or lumpy nature of the mortgage market will allow the banks to operate under a three month moving average of this 10/80 rule, and given the pipeline of approved loans that have yet to be advanced, there is a six month grace before the scheme takes full effect.
The penalty on the banks for breaching these new rules is the loss of their licence, a threshold that suggests the banks will impose their own internal lending practices that will undershoot the upper limit.
According to Nick Tuffley, Chief Economist as ASB, “The Reserve Bank of New Zealand estimates the 10 per cent speed limit will limit banks’ high-LVR lending flows to about 15 per cent of their new residential lending… The New Zealand central bank noted that earlier this year that around 30 per cent of new lending was for 80+ per cent LVRs, with recent anecdotes suggesting some reduction to around 20-25 per cent of new lending”.
Reflecting on the reluctance of the Reserve Bank of New Zealand to hike interest rates to tackle the house price bubble, Governor Wheeler noted, “with policy rates remaining very low in the major economies, and falling in Australia, any OCR increases in the near term would risk causing the New Zealand dollar to appreciate sharply, putting further pressure on New Zealand’s export and import competing industries.” Wheeler also noted that with inflation below the bottom of the 1 to 3 per cent target range, there was no need to increase interest rates for inflation reasons.
It is a bold policy step and one that may provide a template on how the Reserve Bank here in Australia may tackle any future house price surge. It will, of course, be fascinating to see how the housing market responds to such a regulatory change, rather than relying on the old-fashioned interest rate hiking method to cool demand.
It is premature to expect a similar approach to be taken in Australia. House prices are only just recapturing the losses from a couple of years ago. The central bank may also hike for reasons broader than housing as the pace of economic growth picks up through the course of the next year. That said, if the housing price lift that has been evident recently picks up further momentum and it occurs when the rest of the economy is subdued, the Australian dollar overvalued and inflation low, the Reserve Bank may well look to New Zealand to see how to dampen a housing bubble without smacking the rest of the economy down.
The Reserve Bank of Australia will be watching events in New Zealand with more than a little interest.
Whatever those relative macroeconomic benchmarks say about New Zealand continuing to lag behind Australia, New Zealand could well be leading Australia with its approach to managing a potential housing bubble in the context of ongoing low inflation, a high currency and let’s say a problematic outlook for the economy.
Grab your place in the next Certificate IV Course!
© Copyright 2018 Accredited Broker. All Rights Reserved.