Editorial: Lending curbs good for banks and borrowers

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Opinion

Moves to take steam out of housing market laudable

The Reserve Bank is possibly the only entity in New Zealand that believes housing is not a rock-solid investment. Successive governors of the bank have given warnings from time to time that house prices are not a one-way bet - that they can fall as suddenly as they have risen. But nobody else seems to believe it, not even the banks, which continue to lend on residential property as though the risk was negligible.

Now, for the first time, a governor has gone beyond a mere warning. Graeme Wheeler has invoked his power to regulate the mortgage lending banks may do on very low deposits. Most of the discussion since he proposed a restriction has been concerned with its effect on house affordability, particularly for young first-home seekers on modest incomes. But it is not primarily in their interest that Mr Wheeler has acted.

His statutory job is to maintain the stability of the financial system, and he says the rate at which house prices are rising poses a potential risk to the system and the broader economy.

"Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future," he says.

If that were to happen, of course, the borrowers on low deposit would be the first to lose their equity and they could owe the banks more than their house was now worth. If they stopped making mortgage payments, the bank could be left with a house of too little value to cover its outstanding loan. So the loan-to-value restriction is in the best interests of both borrowers and lenders if there is a risk that house prices will fall.

But how significant is the risk really? By the Governor's own admission, house prices did not fall significantly in this country even after the boom of 2003-2007 when New Zealand's house prices rose more rapidly than in any OECD country enjoying the boom. After a "small correction", he says, house prices are again high by international standards when compared to household incomes.

The Reserve Bank is not alone in worrying about this, he says, citing similar expressions of concern from the International Monetary Fund, the OECD and three major international rating agencies. Yet New Zealanders remain supremely confident in residential-property investment, many using it to save for retirement. Newcomers are no less attracted to housing here, quickly assessing that it is the safest investment of the capital many are obliged to bring into the country to qualify for residency.

Contrary to the warnings of economists, it is common to hear investors say property has never let them down. The economists' warnings, though, have an ulterior purpose. They believe that while property might be good for the personal investor, it is not so good for the economy. It is attracting capital that might otherwise be invested on more productive ventures and it is keeping the dollar's exchange rate at levels that lower export earnings.

These, too, are not the Reserve Bank's statutory concerns. But they are reasons to applaud any measures that might take some of the steam out of the housing market. Loan-to-value restrictions might shut out the poorest home-seekers but they will also limit the number of second homes that can be bought with less than a 20 per cent deposit.

They are not intended to lower house prices, merely restrain their rate of increase. If that happens, nobody will lose equity but capital gains will no longer be as assured.

Housing will be less attractive to investors than to genuine home-seekers with adequate savings, as it should be.