LVR - the Reserve Bank has failed again

It’s official – the failed LVR mortgage restrictions are here to stay and there will be no change to their current settings. In making this decision, the Reserve Bank is compounding what I believe to be the most profoundly stupid monetary policy to have been introduced in the past 40 years.

To be fair, I’m pretty much alone in making that claim. If you do a search on the term ‘Loan to Value ratio restrictions’ you’ll find various articles describing the restrictions – some positive, some negative – but mostly accompanied by a general consensus that the restrictions have ‘worked’.

This consensus says a lot about the ability of the Reserve Bank to manipulate the narrative, over the past 7 years, because the restrictions very clearly haven’t worked.

Here’s why:

The Loan to value ratio restrictions were introduced, by the Reserve Bank, in 2013, as a method by which to constrain bank lending by setting a minimum deposit on home loan lending. The rules have been tinkered with since they were first introduced, but the current settings mean that home buyers require a minimum deposit of 20 percent of the value of a home and investors need a 30 percent deposit. There is a 20 percent exception to this rule (called a ‘speed limit’) which means that up to 20 percent of the loans extended by banks can be to borrowers with lower deposits.

When these rules were introduced they had a very clear purpose - to moderate house price inflation. Which is another way of saying that their goal was to cool the market, and perhaps to even bring house prices down. That this was the original goal is acknowledged in a briefing paper, circulated by the Reserve Bank, as recently as May of this year.

So, did the restrictions curb house price inflation?

Not in the slightest.

Between the introduction of the restrictions in 2013, and mid- to late-2017, Auckland house prices continued to accelerate away. They eventually flattened off at the point of the cycle only when they had been predicted to do so by me and a few other commentators.

This had absolutely nothing to do with the LVR restrictions. As for the rest of the country, most regional towns and cities are still experiencing strong house price growth as I write this article. Which, again, is just as would be expected as part of the market cycle.

So how did the Reserve Bank respond to this failure?

They simply changed the narrative and reverse engineered their rationale for the policy claiming that, instead of being about cooling house prices, the restrictions were actually about market stability and the risk of a crash if house prices got too high. They’ve even produced pretty graphs that claim to show how the policy has reduced bank exposure to ‘riskier’ borrowers.

This sounds comforting, but it’s nonsense – firstly because there’s no measurable correlation between less lending and the ability to identify ‘risky borrowers’, and secondly because there was no basis for the ‘Damascus Road conversion’ claim to be worried about market stability in the first place.

The New Zealand property market has actually been remarkably consistent for almost 40 years. The only time we’ve experienced anything even remotely resembling a ‘crash’ was in 2008, following the GFC, when prices bottomed out 8.6 percent below the market peak, before quickly recovering and taking off again.

Of course, it could be argued that it is the role of the Reserve Bank to keep the market ‘safe’ and that, even if the policy was a sledgehammer to crack a walnut, it was ‘well intentioned’. This view would have more credibility if the LVR restrictions hadn’t done so much damage to the aspirations of one particular section of the market – first home buyers.

While it’s true that first home buyers have been the single biggest buyer group in the market, everywhere except Auckland, since 2013, it is also true that they would have been even more active had it not been for the LVR requirement to have a 20 percent deposit when buying a home, which has closed many of them out of the market. The starkest evidence of that is the fact that Auckland, where prices are generally highest, is also the city in which first home buyers have been least active because a $180,000 deposit on a home is simply out of reach for many of them.

Make no mistake – all of the other claimed ‘culprits’ for our housing woes have both winners and losers. For every person who has been adversely affected by high house prices, high immigration, low interest rates, competition from investors and claims of a housing shortage, there are also people who have benefitted from those things. Not so with the LVR restrictions, where there are no winners and one group which has very clearly been penalised.

Today’s LVR review could have addressed that. It could have lowered, or removed, the LVR rules on first home buyer, a move which would have assisted a very large number of Kiwis toward their aspiration of home ownership without the slightest impact on the market at large.

Instead, the Reserve Bank continues to ignore the damage caused by the policy. And in doing so it is directly responsible for limiting the rate of home ownership among young Kiwis and dashing the ability of those people to accumulate the wealth they will require in retirement.

Shame on them.

- Ashley Church is the former CEO of the Property Institute of New Zealand and is now a property commentator for OneRoof.co.nz. Email him at [email protected]