Steps to slow home value rises deserve to succeed.
The Reserve Bank is going to take action to suppress the residential property market. That much is abundantly clear in its proposals for a restriction on the number of bank loans that can be made to borrowers with low deposits. It is called a proposal, and lending banks have been given until early next month to comment on the details, but the tone of governor Graeme Wheeler's language leaves little doubt he will act, probably by August.
House prices in Auckland and Christchurch are rising again at a rate that was noted with concern in the bank's regular monetary policy statement last Thursday. Unchecked, the property market threatens to rekindle general inflation which the bank could counter only by raising interest rates. That is a step it does not want to take for fear of reversing the dollar's recent fall and sending the economy into a slump.
The bank is worried about property prices only for the likely implications for inflation. It is not the bank's role to consider housing affordability or social equity and the governor has not tried to hide the fact that first-home seekers will feel the pinch of his intended lending restriction. The Prime Minister's stated belief that they would be exempt must have been a misunderstanding of his discussion with Mr Wheeler before the announcement.
The governor says first-home buyers cannot be exempt if the regulation is to be effective. They comprise 30 per cent of the market, as do those with mortgages of 80 per cent or more, the likely threshold of the loan-to-value limits.
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On the face of it, the proposal seems unfortunate for those most in need of help to afford a home of their own. But if they were exempted, and the lending restriction on others sent house prices lower, those who had borrowed on very low deposits could suffer a worse fate. Their equity would be wiped out; they would owe banks more than their house was worth.
Mr Wheeler was working in the United States when the last housing bubble burst and he saw the consequences for "sub-prime" mortgages. He does not want to send house prices lower, merely slow their rate of increase. He calls the proposal "speed limits".
The limits could take the form of a rule that no more than 10 per cent of a bank's new lending on residential property can be for more than 80 per cent of the property's value, and no more than 5 per cent can be for more than 90 per cent of the value. The discussion paper sets out the likely rules and procedures with such precision that lending institutions will probably start preparing their loan books this week.
The Reserve Bank has clearly learned from the last house price boom when its previous governor, Alan Bollard, spent years trying to talk the market down with warnings of the pain households would suffer when inevitably the bubble burst.
The warnings proved to be overstated, the pain when it finally came was largely confined to investors in finance companies. House prices did not fall as drastically as they did in some countries, sellers preferred to withdraw property from the market and wait.
Mr Wheeler is speaking more softly than Dr Bollard did and wielding a bigger stick. Central bankers everywhere have learned that asset price inflation matters more than they had realised. It can not only fuel consumer prices. It can, and did, destabilise the global banking system. Elsewhere, loan-to-value regulations are being devised for the system's greater security. Here, they are proposed as a means to rein in rampant house prices. Let us hope they can.