There has been a lot of commentary since the introduction of the rules about their impact on smaller housing markets, many of which are not experiencing inflation anywhere near Auckland’s.
Banks must limit their lending to borrowers with a deposit of less than 20% to no more than 10% of new home loans.
But Alexander said those complaints missed the point of the restrictions.
“[The rules] were not driven by specific concern about the Auckland housing market and there is nothing inequitable about regional housing markets suffering because of the rules. I state this because the Reserve Bank did not primarily introduce the rules in order to stem house price inflation whether that be from Auckland, Christchurch, Ashburton or Riverton,” he said.
“What the Reserve Bank is aiming to do is limit the exposure of bank balance sheets and therefore the overall economy in the event of a shock which causes house prices to fall precipitously and cause borrowers to face negative equity. Think of that shock as being a foot and mouth outbreak. In the event of such a thing house prices will fall everywhere as the economy shrinks by some huge amount. There is little reason for believing that Auckland house prices will fall more than prices elsewhere.”
He said regional borrowers with a 90% home loan would be as disadvantaged by a 20% price fall as borrowers in a similar situation in Auckland or Christchurch.
“The fact that so many people are bemoaning the large impact which the LVR rules have had in the regions tells us that there are lots of people, proportionately speaking, who buy houses with low deposits outside of Auckland and Christchurch.”
He said, given that the only shock likely to cause a huge decline in NZ house prices was something like foot and mouth disease, chances were that the regions would suffer greater house price declines and negative equity positions than Auckland in particular.
“Arguments against the LVR rules need to be couched in terms other than alleged but unproven disproportionate regional impacts. A better angle is as we have been highlighting the disproportionate impact on first-home buyers compared with foreigners and investors all around the country. In that regard again the regions fare better than Auckland given the lesser influence of now newly-favoured foreign buyers in those non-Auckland markets which traditionally attract less interest from people offshore.”
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