Liam Dann 's Opinion

Liam Dann is the business editor of the NZ Herald

Liam Dann: Bank policy battle is heating up

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Reserve Bank reforms being pushed by Greens unlikely to be the silver bullet for house price bubble.

Green co-leader Russel Norman got stuck in to the Reserve Bank last week. Photo / NZPA
Green co-leader Russel Norman got stuck in to the Reserve Bank last week. Photo / NZPA

Imagine how devastating it would be if you had just struggled to save a 10 per cent deposit for your first home only to be told you now had only half the money you needed.

Say you'd scraped up $40,000 for a property that was still within a Middle Earth quest of the Auckland CBD - no easy feat on a median wage.

How would it feel to find out you need another $40,000 because there had been a change in bank regulatory policy and all home buyers must have a 20 per cent deposit.

Unfair? Being told these rules were part of a broader economic policy that might eventually curb house prices would hardly make you feel any better.

Still, that's the scenario the Green Party seems keen to see inflicted upon young savers.

Green co-leader Russel Norman got stuck in to the Reserve Bank last week, pointing out the bank's own research found merit in imposing these kinds of restrictions - known as Loan to Value Ratios (LVRs).

He neglected to mention that the Reserve Bank is acting and is considering LVRs in a review of macro-prudential policy (ie, its tools to ensure financial stability). The Reserve Bank will produce a policy document in late March which will then go out for public consultation.

Perhaps the Reserve Bank isn't acting fast enough for the Greens, but it seems prudent to move cautiously on these kinds of policy changes because they have a big impact on the lives of many New Zealanders.

It is also unlikely that the Reserve Bank sees LVRs as the kind of silver bullet for house price bubbles that Norman suggests they are. Certainly LVRs could be used to curb the riskier 100 per cent and 110 per cent lending we heard about at the height of the last property boom in 2007.

But those kinds of restrictions are more likely to be focused on protecting the banks from themselves. The idea is to ensure the banks don't get carried away with aggressive lending and get themselves in to the kind of trouble that would do serious damage to the local economy.

That's part of the Reserve Bank's financial stability brief - not part of its role in setting monetary policy.

But Norman links the two. He argues that the introduction of LVRs would bring house prices under control, and that would give the Reserve Bank room to cut rates further and that would bring the dollar down. This seems a huge leap of faith.

Putting rules around the size of deposits required to buy a house won't bother those who've already got cash or have plenty of equity tied up in other properties, although it will certainly make getting on the property ladder harder for those on lower incomes.

The powers of supply and demand are strong and where there is serious population pressure they typically prove stronger than regulatory forces.

Even in China, where the Government has had the power to implement lending regulations that would be considered draconian in a Western democracy, they have had only limited success in cooling the Shanghai property bubble.

In New Zealand we still like to weigh new regulations against the freedoms of individuals.

Also if house prices did come down - putting aside the risk that would pose to existing mortgage holders - it seems a stretch to assume that we'd automatically see interest rates cut, and that the dollar would then fall and we'd all live happily ever after.

Our official cash rate is already at a record low and the dollar is near record highs. If there is renewed enthusiasm for the property market then it is probably at least in part because those rates are so low. If rates went lower still then that would be a counter balance to any effect the LVRs were having in the first place.

And if the dollar comes down that will be good news for exporters but bad news for consumers of imported goods. Prices for those things we import would rise, causing inflationary pressure which requires the Reserve Bank to raise rates.

The point is that these things are very complicated and there are many opposing forces at work in a modern economy. The outcomes of making a change are seldom linear.

But we'll hear plenty more about Reserve Bank reform from opposition parties over the coming months. The focus of the Greens on bank lending restrictions is part of a wider trend of calls to overhaul the Reserve Bank Act.

On the monetary policy front we hear arguments for a loosening of the focus on inflation and inclusion of other economic indicators in the Reserve Bank's reckoning - employment and GDP, for example.

There are some interesting ideas and there is always room for discussion but we should recognise that any radical shift in Reserve Bank policy risks breaking the rule behind that most basic of proverbs - a bird in the hand is worth two in the bush.

We know the Reserve Bank can control inflation but we do not know if changes to the act would succeed in controlling the dollar or creating jobs or improving the general well being of New Zealanders.

We also know that high inflation is disproportionately negative for lower wage earners who have to spend a higher percentage of their earnings on essential goods and services.

Labour, in particular, should remember that when working through its policies for next year's election. The Clark/Cullen Government was well aware of it and didn't feel compelled to mess with the Reserve Bank Act even as New Zealand went through the biggest housing boom in a generation.

Given the historical likelihood that Labour will hold power again - either after 2014 or 2017 - the party needs to think very carefully about monetary policy.

Finance spokesman David Parker has indicated that this is a discussion worth having, which is fair enough, but it would be worrying to see the Labour Party captured by simplistic thinking of the smaller parties.

Nobody is arguing that the exchange rate and housing affordability are not major issues for the country.

But surely a bolder, more visionary approach is not to seek to drag house prices and the dollar down.

They'll all have different ideas about how to do it, but the goal of political parties across the political spectrum should be to lift wages up and to create an environment where exporters can survive even when the dollar is high.

Like it or not, we live in a Pacific paradise and as long as the rest of the world sees value in our economy then we will face upward pressure on property prices and the dollar.

This country needs policies which create wealth and share it with ordinary New Zealanders so the global market doesn't see them left behind in their own country.

- NZ Herald

Liam Dann

Liam Dann is the business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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