Editorial: Income limit on mortgage may be useful

if the Reserve Bank was to be given power to impose a maximum income ratio, what should it now be? Photo / Mark Mitchell

Editorial

It is hard to understand why the Finance Minister is wary about giving the Reserve Bank the power it wants to impose an income limit on house mortgage lending. The bank already has the power to regulate lending as a ratio of the property's purchase price and has used it to some effect. What harm could be done by adding another weapon to its armoury?

Probably none, but Bill English is cautious. It is, he says, a significant policy change that has never been tested in New Zealand. He has the luxury of time to consider it properly. The bank governor, Graeme Wheeler, says he is not proposing to use the power in the present circumstances, but he wants to have it in reserve in case the market takes off again. Of course, having income ratios in reserve would probably help to ensure bank lending and house prices did not resume their trajectory of recent years. Latest figures suggest there is no immediate hurry.

The proposed powers should be carefully examined by the Treasury and be the subject of the widest possible consultation and rigorous analysis of all possible implications. Regulations can have unintended and quite perverse consequences. A limit on lending as a ratio of the borrower's income could easily make the market even more forbidding for first-home seekers. It is not the Reserve Bank's role to worry about issues of social equity; it is charged with maintaining the stability of the banking system and would impose an income ratio out of concern that trading banks are overexposed to loans their clients cannot afford.

The banks themselves ought to be the best judge of that. Their very survival depends - or should depend - on ensuring their customer can meet their loan commitments. But as the global financial crisis revealed, many of the world's leading banks had not been sufficiently prudent in that regard, and their survival did not depend on it. They were too big to be allowed to fail. Since taxpayers were obliged to bail them out, governments and central banks have every right to impose whatever prudential regulations they see fit.

The Bank of England already limits home mortgages there to a maximum of 4.5 times the borrower's annual earnings. A ratio of that order would strike particularly hard in the Auckland market, where house prices have reached nine or 10 times the average household income (one of the highest ratios in the world). Yet so far we have not suffered a rash of foreclosures and mortgagee sales.

So if the Reserve Bank was to be given power to impose a maximum income ratio, what should it now be? And how would that be decided?

During the past two months, the market has at last come off the boil. The reason probably has less to do with anything the Reserve Bank has done than with decisions taken by the major trading banks and their Australian owners around mid-year.

Concerned at their rising borrowing costs, they are said to have stopped lending on apartment developments and have been reluctant to lower their lending rates in line with the Reserve Bank's cuts to the official cash rate.

In these circumstances of cautious lending, increased building and a sense that the crisis has passed, a debt-to-income rule may be superfluous. But if it passes a practical evaluation, it would seem worth adding to the arsenal.