Key: LVR restrictions may be best solution

John Key spoke to Local Government New Zealand this morning.

Key had previously said he would like the Reserve Bank to exclude first-home buyers from any moves to restrict high LVR lending, but he did not reiterate that today.

Reserve Bank governor Graeme Wheeler has indicated he did not agree with that view, because of the significant proportion of low-equity lending that is done to first-home buyers.

The move to LVR restrictions is primarily designed to increase the stability of the banking sector and Wheeler has said highly-leveraged first-home buyers could be vulnerable in the event of a house price collaps.

Key said today that a solution would require a fine balance: “First-home buyers are a priority for the Government – that remains my view. It is worth however, putting some context around the actions the Reserve Bank is considering. Absent of any other alternative, then rapidly increasing house prices may see the Reserve Bank raising interest rates, which will affect everyone - all mortgage holders and businesses, whereever they are in the country, as well as the Government. That is certainly not in the best interests of first home buyers.”

He said interest rates might rise eventually anyway, but macroprudential tools would give the Reserve Bank alternatives.

New Zealand needed to focus on the stability of the banking system, he said.

“Housing bubbles overseas, like in the US where subprime mortgages were hugely popular, had in the end a very negative impact on the American economy. It left US banks and many homeowners very exposed and it had a dramatic negative flow-on impact, as we all saw. So it’s an issue that has to be taken seriously here in New Zealand. If it is left unchecked some buyers could find themselves substantially overexposed in an overvalued market. And we all know what happens if those values start to fall.”