Bollard takes on banks over home loans

Allan Bollard

Reserve Bank Governor Alan Bollard lashed out at banks, the real estate industry, borrowers and the Government yesterday, saying he could not curb inflation singlehanded.

"There are other key players in this process, all with responsibilities," Dr Bollard told the Employers and Manufacturers Association in Auckland.

Banks needed to look beyond short-term profits and market share.

Their long-term interests would not be achieved if they promoted loans to people who could not afford them, he said.

In a shot at the Government, he said: "The more the Government can work to reduce fiscal pressures on the economy, the easier our job becomes."

And he took aim at those in the housing industry who say the market can continue sustainably at current levels, calling them "self-serving and unhelpful to those who would be caught up and damaged by a property market correction".

About a third of households have mortgages. Of those, one in 10 were quite deeply in debt, Dr Bollard said, already spending more than half their after-tax income servicing their mortgages.

"These people are vulnerable to interest rates rising, property prices falling or their employment positions becoming more fragile," he said.

Bank economists last night said the comments were a frustrated reaction to Dr Bollard's own inability to dampen inflationary pressures.

BNZ chief economist Tony Alexander said BNZ had been saying for a year that Dr Bollard could have done more to control inflation. The Governor was now asking for help from banks. "But I'm not sure what form that help would take."

ASB chief economist Anthony Byett said: "Banks are only doing what any good business in New Zealand should be doing - acting in a competitive way, and trying to do the best for their customers."

Former president of the Real Estate Institute, Graeme Woodley, conceded that some in the housing market were probably guilty of talking up market trends in a self-serving manner, though he said the institute had never done so.

"I agree with Dr Bollard in terms of being careful ... What he would like is for the market to quieten without him taking monetary action," said Mr Woodley. "The market has quietened down but demand is still there, though it's not as great."

Dr Bollard said inflation in the housing market had spilled over to the wider economy.

That was partly because homeowners, seeing the value of their properties rise over the past five years, have felt richer and spent more on unrelated items such as entertainment and travel.

Dr Bollard has raised his official cash rate eight times since the start of last year.

But borrowers' preference for fixed-rate mortgages has meant the effective or average mortgage rate people are paying has increased much more slowly, from around 7 per cent last year to a projected 8 per cent next year.

- additional reporting Derek Cheng