It's time to talk about the Reserve Bank’s loan-to-value-ratio (LVR) restrictions.
The LVR restrictions were launched in 2013 with the grand claim that they would halt capital growth and maybe even reduce house prices. When they failed to do this - and house prices continued to increase strongly over the following few years - the Reserve Bank claimed that the LVR restrictions weren’t about reducing house prices after all and they were in fact introduced to stabilise the market. As a result of this I think most people, when asked about the restrictions, will express the view that they brought down house prices or steadied the housing market despite the overwhelming evidence being to the contrary.
The real legacy of the restrictions is the extraordinary damage they’ve done to the housing market – particularly to young first home buyers. The LVR requirement to have, in most cases, a 20 percent deposit means that tens of thousands of first home buyers were closed out of the market, particularly in Auckland, where a typical deposit of more than $150,000 is required. This would possibly be excusable if the restrictions had a legitimate purpose, but in the absence of such a purpose their continuation is a scandal.
Which begs the question, why has the Reserve Bank persevered with them?
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I’ve asked myself this question a few times and can only come up with two possible reasons: either they believe their own publicity and actually think that the restrictions have done some good, or they’ve painted themselves into a corner where they couldn’t remove them without having to explain why "market stability" was no longer important.
In my view, it’s the latter. The Bank is simply a victim of its own hubris and constrained by a market cage of its own making. It knows that removing the restrictions would have made absolutely no difference to the market and that questions would then quickly have been asked about why we had endured with such a destructive policy for so long.
Until, that is, the advent of coronavirus. The extraordinary economic measures which have been taken to halt the spread of this virus have no precedent in recent history and the environment in which we’re operating is like nothing that any of us has ever seen before. All of the accepted wisdom around economic management is being thrown out the window as governments around the world move to protect their citizens while trying to maintain confidence and consumer activity.
This creates a perfect opportunity for the Reserve Bank to remove the LVR restrictions. In doing so it could reasonably claim that it was removing the restrictions to ensure that the property market continues to operate at a time when market activity might otherwise drop away. It could further argue that such a drop in activity might trigger a collapse in house prices at a time when it was important to maintain confidence in the housing market. I hasten to add that I don’t believe either of those things to be true – but both claims fit comfortably within the Reserve Bank narrative.
The Reserve Bank could also note, with some credibility, that dropping the LVRs at this time wouldn’t lead to runaway house prices because most of the conditions for strong capital growth (confidence, immigration, demand) are absent while coronavirus remains a threat. Similarly, it could claim that, in this instance, market stability would be enhanced by the removal of the LVRs at a time when the market might otherwise drop away.
Whatever the reason, the results of such a move would be welcome. While, in my view, there’s little danger of the housing market collapsing in the turmoil associated with Covid-19, removing the LVR restrictions would be a useful additional support to the housing market at a time of understandable fear and concern. More importantly, first home buyers who have been closed out of the market would have an opportunity to finally buy a home – and at a time when they will probably be able to negotiate a more favourable price than might have otherwise been possible.
Having endured seven years of Reserve Bank intransigence, wouldn’t it be an irony if it was the impost of coronavirus which finally brought about the end of the pernicious LVR restrictions.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
