Philip Macalister: Bank must take care not to hurt those who need help

LVR restrictions will likely it first-home buyers harder than other borrowers. Photo / Jeff Brass

I like my toolbox. It has plenty of useful tools such as screwdrivers, spanners and hammers, to name just a few. We learned this week from the Monetary Policy Statement that the Reserve Bank has a few new tools in its box to fix the economy when things get heated.

I may have woodworking or metalwork tools but the Reserve Bank governor has "macro-prudential" tools.

Not sure if this sounds like something from a sci-fi book or from a Terminator movie but they sure sound impressive. The one which has been talked up by commentators is around putting limits on loan-to-valuation ratios with bank lending.

These commentators think that property investors are evil and totally responsible for pushing up house prices.

This couldn't be further from the truth. A survey the NZ Property Investor Magazine has just conducted reveals that property investors are actually pretty conservative with their loan-to-valuation ratios.

Just 21 per cent had LVRs over 80 per cent. More than half had LVRs sitting between 50 per cent and 80 per cent.

In anyone's view these are pretty conservative ratios.

The people using high LVR lending tend to be first home-buyers. It is this market that the banks are actively chasing at present.

There is criticism that banks have now started doing 100 per cent deals. I suspect you could count the number of deals like this on a couple of hands and that banks would only do such a deal if the borrower had lots of assets and excellent loan servicing ability.

Putting LVR restrictions on lending is no silver bullet to dealing with a housing bubble. It is one tool which may help, but it is likely to hit first-home buyers harder than other borrowers.

Reserve Bank governor Graeme Wheeler has some other new tools and it will be interesting to see if they work. He has counter-cyclical capital buffers and core funding ratios and capital risk weighting in his box.

And perhaps even more interesting is his comment that next time there is an asset bubble, these tools are likely to be deployed before changes to monetary policy, such as hiking the interest rate.

It looks like Wheeler's tools are real tradesmen ones, not the home handyman type in my toolbox.