Bankers recoil at housing market plans

Reserve Bank and Treasury moves to bring the housing market to heel have been labelled "draconian" and a return to old-fashioned Muldoon-style interventionism.

Economists and bankers were universal in their condemnation yesterday, calling the proposed review of banks' lending practices "bad economics" and quite unnecessary.

Political pressure was also fingered by ANZ National Bank chief economist John McDermott as being in the mix.

The Reserve Bank and Treasury intend looking at "structural and cyclical policies" which could be deployed quickly to cool off the housing market.

"In particular, the review will look at policies that may influence housing credit growth independently of changes to the OCR [official cash rate]," the bank said.

The measures included setting limits on the ratio of a property's purchase price banks could lend to buyers and new rules determining how much banks could lend in proportion to their own assets.

"Other direct interventions to influence the quantity and or price of mortgage lending" would be examined.

At least some of the measures would likely require legislative changes and an initial report would be provided to Reserve Bank Governor Alan Bollard and the Secretary of the Treasury by January 31 to be shortly followed by a report to Finance Minister Michael Cullen.

Surprised by some of the measures being considered, McDermott said: "You don't solve a problem by adding more regulations into an economy. You end up smoothing over the symptoms of the problem but it delivers lots of negative and unintended consequences elsewhere."

Westpac chief economist Brendan O'Donovan said those unintended consequences could include hitting small businesses, which often secured lending over residential mortgages. "A credit squeeze could hit hardest on the small business sector, reducing their investment and growth capability."

Deutsche Bank senior economist Darren Gibbs said it was understandable the Reserve Bank would want to make sure monetary policy was being run in a "best practice" way, but he suspected it was already and saw little merit in the proposals.

"Do we want to go back to the days when the central bank or Government or whoever tells banks who they can lend money to and how much? I would suggest not, we left all that behind."

ASB managing director Hugh Burrett described some of the proposals as "draconian".

"Anything that starts to re-regulate starts to smack of the Muldoon era. I would subscribe more to supply and demand sorting this out."

Massey University head of banking studies David Tripe said the Reserve Bank would be better trying a market-based approach rather than direct intervention. "I can't help but feel that the fiddling around with capital ratios, trying to impose little bits of regulation here and there is something of a second-best option and it may not achieve the desired outcome."

Gibbs and Tripe said if Cullen and the Reserve Bank decided to run with the proposals, they would take months to implement. By then, and amid signs the economy is already slowing down, the housing boom may have already run its course.

The moves to re-regulate come after weeks of frustration for Bollard in which the booming housing market and consequent inflation have remained stubbornly impervious to two years of interest rate hikes. New Zealand has, for some time, had the highest official rate in the developed world - now 7 per cent - but that has yet to curb inflation and has kept the dollar at export-stifling highs.

The bank said the strength and persistence of domestic demand, the size of resulting economic imbalances and the key role being played by the housing market had prompted the review.