In recent months, Graeme Wheeler (Governor of the Reserve Bank) has been stuck between a rock and a hard place. By implementing the LVR limits he has alienated a significant proportion of New Zealanders, however the alternative- to raise the official cash rate (OCR) would be an even worse outcome.
There has been a lot of criticisms of the LVR policies ever since they were announced- with numerous local financial commentators lambasting them for a variety of reasons- including:
- That the policy excludes primarily new home-owners when it is investors driving demand.
- That the policies do not address the bigger picture- that much of Auckland’s housing shortages are due to the metropolitan urban limit, which needs to be extended in order to increase supply.
- There is potential for the construction sector to be adversely affected, with less New Zealanders able to afford buying properties to then build upon or renovate.
- Investors- particularly foreign investors- have a leg up in the market, and as such will further reduce accessibility for New Zealanders.
However, since they began officially in October, criticism has not waned – instead critics are eagerly watching, keen to point out failures in the scheme and prove their predictions correct.
Lack of LVR Results
Meanwhile, Wheeler and his staff attempt to justify its lack of results so far. Deputy governor Grant Spencer tried to appease the polices critics recently, stating that they didn’t discriminate against potential first home buyers, and that whilst it was too soon to see their effects on property inflation, their primary objective- to limit high LVR lending- was being achieved.
Just one day after these comments, a BNZ-REINZ survey indicated that 78% of real estate agents had seen less first-home buyers in the market in the month prior -indicating that the RBNZ’s analysis may be a little too optimistic yet.
However, on the back of all of this it is worth remembering that these policies do seem to be the best option available to us – and this course of action is being touted as exemplary by leading foreign commentators.
Housing Bubble Collapse
A recent example of this is a piece written by Peter Orzag* for Bloomberg news agency. In it, he praised the RBNZ’s actions, describing the proactive policies as something that the US Federal Reserve should have been implementing to prevent their own housing bubble collapse. Furthermore, he goes on to indicate that the style of LVR policies the RBNZ has implemented are innovative in that they are limits – not absolute bans – on high LVR lending, as has been implemented in Canada and Israel among others. The implication being that that this may prove in New Zealander’s favor with less absolute policies meaning more first home owners can access the property market.
However, it is Orzags conclusion that is particularly notable “the mortgage limits are controversial. But they seem likely to help head off a crisis or contain the damage should one occur. Think of how much better off the U.S. economy might have been if the Fed had tried that.”
His support for the policies is blatant, however I find his final comment much more interesting. Would the US’s floundering property market and severely destabilised economy have been better off? Nobody can be certain, but this ‘what if’ is one that New Zealand has avoided, and in doing so delayed further, harsher measures such as a rise in the OCR- or worse still, economic collapse.
* Vice Chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration
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