Liam Dann: Bank policy battle is heating up

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

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

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 l