NZ Herald editorial: PM hits an odd note on house lending rules

Prime Minister Bill English. Photo / Michael Cunningham

Editorial

It is strange that the Prime Minister should be so quick to support the call from a real estate agency for the Reserve Bank's home lending regulations to be relaxed.

It is only a year since the heat went out of the house market and prices have just begun to fall. The cooling is apparent in the low number of listings at present rather than plummeting prices.

Low volume is bad for the real estate business but not for homeowners unless they have taken on too much debt in expectation of a capital gain. The fact that volume has dropped and prices remained fairly stable suggests the vast majority of investors can service their loans.

So why has Bill English put pressure on the Reserve Bank to relax the loan-to-value ratio it requires lending banks to maintain?

It is hardly in the national interest to let house prices take off again and it is hard to see it is in the National Party's interest so close to an election.

Housing affordability for first-home seekers has been the issue National has most to fear at the polls. It is of concern not just to young voters looking for a house but to their parents and grandparents who want them to have the Kiwi birthright.

Has National given up those votes to Labour and calculated it has more to gain by siding with homeowners and investors fearing a fall in prices.

It now looks as if the outlook for house prices could depend very much on what happens on election day. Labour promises to take further steps to dampen the market, including extending the bright-line test for capital gains tax to five years. National signalled yesterday it believes the "correction" has gone far enough.

"It raised the question," said English, "of how long [lending restrictions] would be there for. It is important that the people who put them in place have thought through the conditions under which they remove the LVRs. Because ideally, they are not a permanent feature of the market."

But why should they not be permanent? Loan-to-value ratios are an attempt to ensure trading banks do not issue too many overvalued, under-secured home loans of the kind that caused the last global financial crisis.

New Zealand's Australian-owned banks stood up rather well in the crisis and there is no reason to think they are any less secure today despite house prices here being the highest in the world relative to incomes.

In fact, it was probably the trading banks' decisions a year ago to reduce their exposure to the New Zealand house market that stopped prices rising. Tighter Reserve Bank ratios had been in force since the previous year without noticeable effect.

The latest ratios, weighted against Auckland investment property, came into force soon after National's two-year bright-line test for capital gains tax was introduced in October 2015. Yet the LVRs alone are usually credited with cooling the market.

The capital gains tax was probably just as effective, as may be apparent a month after the election when its two-year test begins to release houses for tax-free sale.

But the LVRs have set a good standard of prudence for lenders and borrowers and it is a standard that should remain.