Editorial: Bank's move good news for home seekers

The bank's arsenal is financial regulation which it will use to the maximum when it imposes a new restriction on lending to Auckland rental investors. Photo / Brett Phibbs

Opinion

At last something is to be done about Auckland house prices. The Reserve Bank yesterday stepped into the breach left by the Government's disinclination to take action on both sides of the market.

The Government continues to insist unaffordable prices are entirely caused by a shortage of houses, but the bank has long recognised that demand has to be tackled too.

Taxation is the best weapon for that purpose but only the Government possesses it. The bank's arsenal is financial regulation which it will use to the maximum when it imposes a new restriction on lending to Auckland rental investors. They will need a deposit of at least 30 per cent to buy any more houses on bank loans. This should limit the number of mortgaged properties someone can amass, or at least ensure it takes longer to raise finance for new purchases from realised capital gains. All going well it should give an advantage to genuine home seekers who can raise a mortgage on equity of 20 per cent, or less if they are among the 10 per cent of home loans that banks are allowed to issue at lower security.

Their prospect of being in the 10 per cent will be higher because investment purchases can no longer be part of it. All of them will be required to stump up about a third of the value of their loan. The rule, to take effect in October but likely to come into practice from now, represents a significant new step for the Reserve Bank. It is the first time it has taken selective action against one class of home buyer, in just one region of the country.

The difficulties in selective regulation lie at the boundaries, of both targets. The distinction between owner-occupied and investment property becomes blurred when the house is the buyer's second home, used at weekends or for holidays. When the details are finalised in a few months, the rule could simply exempt any house that is not rented at any time.

Even the boundary of Auckland is not as easily defined as it sounds. The bank could use the Auckland Council boundary but already at Pokeno commuter housing is pushing over the border into the Waikato District. Regulations often have perverse consequences and this one could encourage ribbon development beyond the designated region.

But if the bank can slow the rate of Auckland house price inflation to a degree that gives young savers greater hope of affording a home, selective regulation will be worthwhile. The bank has not expressly acted in the interests of affordability, social policy is not its statutory purpose. It is acting under its responsibility for the stability of the financial system and claims the rate of increase in Auckland house prices over the past summer represents a serious risk to the system.

However, it concedes the banking system has good funding buffers as it stands. The real problem for the Reserve Bank is that it needs to lower its official cash rate later this year in line with low inflation worldwide but it does not want lower interest rates to send Auckland house prices higher. But its pretext for acting is less important than the social consequences. For young home seekers they should be good.