Watch that LVR twist

New rules require investors to pay a 30% deposit on property purchases. Photo / Doug Sherring

Watching the Reserve Bank grapple with the housing market over the past two years has been like watching someone blowing up a long, thin party balloon and trying to twist it into one of those sausage dogs.

But the balloon blower is doing it behind his back with the help of a mirror, and for the first time. Each time the bank blows up the balloon and twists it one way, the air squirts to another part of the balloon, the rubber squeaks and the balloon squelches into a different shape.

The Reserve Bank's decision to give up on its two years of opposing regional restrictions on loan-to-value ratios (LVRs) and to target rental property investors in Auckland is a welcome sign it's getting closer to the perfect balloon sausage dog.

But it has taken a few iterations and it's not there yet.

The bank's first attempt in 2013 was deliberately simple because it was reluctant to delve too deeply into the business of telling banks how much to lend and to whom.

All residential property loans in all parts of New Zealand were treated the same. The banks were limited to no more than 10 per cent of new loans having only a 20 per cent deposit. First-home buyers, rental investors, new builders, Southlanders and Aucklanders alike were treated the same.

For a long time the bank argued that first-home buyers did not lose out too much to investors and that it was almost as worried about house prices in the rest of New Zealand as it was about Auckland.

The first change in balloon-folding technique came in December 2013 with an exemption for high-LVR mortgages for new houses after a righteous howl of protest from new-home builders.

This addressed the first unintended consequence of the policy, which was to potentially restrict new supply in a market screaming out for it.

As 2014 progressed, the LVR extended beyond the temporary period suggested when it was introduced in October 2013.

That was because the initial effect on house-price inflation was bigger than expected and the time bought to delay sustained interest rate hikes kept being dragged out as inflation died a death.

This week's pirouette and somersault was the biggest shift yet, requiring Auckland property investors to have a 30 per cent deposit and increasing the speed limit on high-LVR loans outside of Auckland from 10 per cent to 15percent.

To be fair to the Reserve Bank, plenty has changed over that two years, including an election result that removed the prospect of foreign buyer restrictions and a capital gains tax, lower fixed mortgage rates, record high net migration and a growing supply shortage.

The Reserve Bank should be congratulated. But it could do with help to suck some air out of the market.

It said it would welcome better data on foreign buying of properties and called on the Government to reduce the tax incentives for properties. It's a pity the Government has refused to help turn off these demand-side pumps into the market.

It's hard to fold the perfect sausage dog when the balloon is getting stretched by the day.

The Government could help by collecting data on foreign buying and adopting restrictions or stamp duties on non-residents buying existing property. That would let out some air and encourage foreign investment in new supply at the same time.