Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell
OPINION:
House prices are above their sustainable level and the Reserve Bank of New Zealand – Te Pūtea Matua – is now considering tighter lending standards to reduce the risks associated with excessive mortgage borrowing.
It's our role - as guardian or kaitiaki of the financial system – to limitthese risks for the long-term wellbeing of everyone - borrowers, lenders and the general economy.
One option is to require borrowers to front with a larger share of the purchase price (deposit) to reduce their exposure to mortgage debt. These tools are known as loan-to-value (LVR) restrictions.
Another option – which can be used simultaneously – is to impose rules on banks to ensure they do not lend unless the borrower is able to weather a wide range of possible mortgage interest rates and income shocks. These tools are known as debt-to-income ratios and interest rate floors. These are the tools that we can now operationalise after the signing of a Memorandum of Understanding with the Government.
We have spoken and written a lot about the many drivers of the current high house prices in New Zealand. We acknowledge that one of these reasons is the low interest rates because of our response to the Covid-19 economic shock.
We had to significantly lower the Official Cash Rate (OCR) to best meet our monetary policy mandate of maintaining low and stable inflation, and contributing to maximum sustainable employment.
The pandemic-induced global economic shock created risks of falling prices (deflation), rising unemployment, and unprecedented global financial stress. The worst of these outcomes has been headed-off by successful health management, government-led wage and business funding support, and lower interest rates aimed to boost cash-flows and keep business afloat.
This is why the current level of interest rates is historically low. This is also why the current level of interest rates is not indicative of where they will be on average through time – or at least over the life of a mortgage.
Interest rates have stayed low since 2009
Economic spending has recovered to above pre-Covid levels, albeit varying significantly across sectors of the economy. And, while there remains an enormous Covid-19 challenge globally, the economic consequences of the virus are somewhat clearer, and health management is advanced.
The Reserve Bank's Monetary Policy Committee needs to think about when and how we would return interest rates to more normal levels, which are neither unnecessarily giving the economy a push forward nor holding it back. Our next opportunity to publicly address this issue is the August 18 Monetary Policy Statement.
Our monetary policy tools (especially the OCR) and our financial stability tools need to be mutually supportive. We need to continuously position the OCR to meet our monetary policy goals, and use our financial stability tools to best ensure that borrowers and lenders are financially capable and savvy enough to manage through the interest rate cycles. This is how the Reserve Bank best contributes to the economic wellbeing of all New Zealanders.
We expect banks operating in New Zealand to take heed of our signal to consult on the tightening of lending standards – both LVRs and debt servicing criteria. They must make their lending decisions with the best long-term interests of the borrower in mind. At Te Pūtea Matua, we are also making the decisions with the long-term interests of New Zealand's economic wellbeing in mind.
