Will macroprudential tools get the right results?

Tuesday 5 March 2013

Macroprudential tools are a step closer, with the Reserve Bank this week releasing its consultation paper on the tactics it may soon use to tackle credit growth bubbles.

By The Landlord

Of the four in question, loan-to-value restrictions have had the most attention – probably because they are the easiest for most people to understand.

Unlike the others, which largely relate to how much capital banks need to have on hand to offset various types of lending, LVR restrictions would dictate whether or not you can buy that $500,000 house with a 5% deposit.

And apart from the occasional commentator who has said such restrictions might sometimes save overly-eager borrowers from themselves, most of the early feedback on LVR restrictions hasn't been good.

We've heard all sorts of criticism, from such a restriction being hard to police, and inappropriate if introduced nationwide,through  to the suggestion that LVR restrictions would have little effect beyond tilting the market in favour of wealthy buyers.

There’s also a risk that buyers could end up in strife if they were forced to go to less reputable lenders to pull together enough cash for a deposit.

The Reserve Bank isn't shying away from the fact that first-time buyers could be disadvantaged.

"LVR restrictions may particularly affect new home buyers with little equity,” it noted this week, adding: "An unintended consequence of LVR limits is that they will tend to directly impede some viable borrowers’ access to home ownership, or to use their equity for other purposes."

If the purpose of LVR restrictions is to slow house price growth, it's hard to see how they will make much difference.

Such a restriction might slow some investors down but most have enough equity in their portfolios that their borrowing isn’t high-LVR, anyway.

To keep within the restrictions, some may be forced to look at investing in slightly cheaper properties – increasing the competition for first-home buyers.

And anyone who has talked to a first-home buyer in Auckland recently will know it’s hard enough to cobble together a 10% deposit – tell them they need to get 30% and many will give up entirely.

Debt servicing restrictions, as imposed in other countries, seem a good idea – and is a good way to provide some financial stability, which is what the Reserve Bank claims is the aim of the exercise.

But the Reserve Bank says that’s not an option it’s looking at, at this stage.

You can have your say until April 10. Banks would get a year’s notice if the Reserve Bank wanted them to introduce countercyclical buffers, three months for sectoral capital requirements for industries such as farming that were taking on extra risk, two weeks’ notice for loan-to-value restrictions and six months’ notice for changes to the core funding ratio.

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