Bernard Hickey: Time to break out the big guns against unwise lending

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Brokers say ANZ and ASB have significantly tightened lending criteria to make it harder and more expensive for people borrowing more than 90 per cent. Photo / HOS
Brokers say ANZ and ASB have significantly tightened lending criteria to make it harder and more expensive for people borrowing more than 90 per cent. Photo / HOS

Reserve Bank Deputy Governor Grant Spencer gave an excellent speech this week explaining why the bank is considering regulating the growth of low deposit mortgages. It was the bank's strongest indication yet it will intervene in the housing market. Anyone thinking of borrowing more than 80 per cent of the value of a property should read the speech and know that window could close by year's end.

Banks already are doing this, imposing low-equity premiums on interest rates for mortgages with loan to value ratios of more than 90 per cent. Brokers tell me our loosest banks, ANZ and ASB, have significantly tightened lending criteria to make it harder and more expensive for people borrowing more than 90 per cent.

The central bank has been crawling all over these banks for months, pressing them to retighten after a burst of competition from last year unleashed a surge of lending growth and turbocharged supply-constrained Auckland and Christchurch housing markets.

The Reserve Bank is right to force retightening, but it may not be enough. Unfortunately, Spencer ruled out hiking the Official Cash Rate. This is where the Reserve Bank risks making the same mistake it acknowledges making before the Global Financial Crisis. It and banks overseas kept interest rates too low for too long because consumer price inflation measures told them there was no inflation problem.

A peculiar type of schizophrenia has taken hold. Many central banks have split into two parts: one to regulate banks to keep them safe, and one to run monetary policy to control inflation. They have separate tools and believe the oil of prudential policy shouldn't mix with the water of monetary policy.

It's time now for the Reserve Bank to prioritise financial stability over its inflation target. The bank should use an OCR hike now to stop the housing boom. It may push inflation below the bank's target band in the short run. But it will help avoid more damaging deflation in the long run if an even bigger housing bubble bursts inside NZ's highly concentrated, and still foreign-funded banking system.

- Herald on Sunday

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