Editorial: Cunliffe home loan policy dangerous for economy

David Cunliffe. Photo / NZPA

Labour's new leader appears to think he can manage New Zealand's financial system better than the Reserve Bank. If he was in power now, he says, he would not allow the bank to include first-home buyers in its mortgage lending restriction to take effect from next week.

The bank is about to limit the amount of lending that retail banks can do on deposits of less than 20 per cent of the price of the house. It is acting out of concern that banks are becoming too exposed to the risk that another house price bubble will burst, causing prices to fall. If that were to happen, the consequences for banks might be costly but for low-equity first-home owners it could be catastrophic.

The little equity they have amassed could be wiped out, leaving them owing the bank more than their house is worth.

If that sounds bad enough, other policies espoused by David Cunliffe would make their position even worse. If elected, he says, Labour would exempt first-home buyers from the new lending limits until its capital gains tax took hold and its low-cost house building programme took effect.

Nothing would be more likely to bring about a fall in house prices than a capital gains tax and an increase in state housing. If Mr Cunliffe had the interest of first-home owners at heart he would not only limit their access to low equity loans, he would do so well in advance of his other proposals.

The Reserve Bank is not expecting to bring about a fall in house prices next month. Its loan-to-value restriction is intended only to slow the rate at which prices have been rising, particularly in Auckland.

When it announced the proposed restriction the Prime Minister made it known the Government wanted an exemption for first-home seekers. The bank was unmoved, pointing out that first-home buyers were about 30 per cent of low-deposit borrowers and they had to be included if the measure was to be effective.

John Key gave way, deferring to the bank's expertise in its statutory jurisdiction. The bank's so-called independence in these matters has been in the bedrock of New Zealand's economy for nearly 30 years. In that time its independence has been respected by both major parties in government and when they were in opposition.

Labour's finance spokesman, David Parker, believes the party could exempt first-home seekers without removing the Reserve Bank's independence; his new leader appears not to care whether the bank's role is compromised or not.

Indeed, Mr Cunliffe reminded reporters that this is not new ground for him. He has already indicated that under him Labour would review monetary arrangements.

Mr Cunliffe needs to be very careful in this area. As the leader of one of the main parties, his utterances could be damaging to long-term confidence in the economy well before he threatens to be in any position to act.

It is hard to believe he would carry out the promise to over-ride the Reserve Bank's independence to exempt first-home seekers, if only because of the obvious risk to their equity. He was looking to score an easy political point.

Anything that makes it harder for first-home seekers to get finance is bound to be superficially unpopular, as proven by a poll at the weekend. Political leaders who withstand this pressure and respect the Reserve Bank's independence deserve more credit for it than Mr Key has received.

Governments are all-powerful in this country, it would be easy to weaken the bank's legislated jurisdiction and do untold damage to our economy.

Mr Cunliffe's stance is a worry.