Who stole my house of cards?
October 16, 2013
There is a great deal of hand wringing, mudslinging and general finger pointing as a result of the Reserve bank announcement of Loan to Value Ratio (LVR) regulations. The regulations in essence limit the amount of low deposit loans a bank may make to their customers. This has resulted in many of the trading banks putting in place a policy that requires home buyers, or for that matter anyone wanting to borrow money secured against property, to have at least 20% of the purchase price. The reasons given by the reserve bank for this action were, to “help maintain financial stability, by providing the Reserve Bank with the practical means of imposing restrictions on the share of high-LVR residential mortgage lending undertaken by registered banks” (RBNZ) In other words the reserve bank was attempting to reign in the overheated property market particularly in the largest cities. This was made clear in a publicity document designed for potential borrowers. In it the Reserve bank had this to say “Restrictions will take the form of a ‘speed limit’ that constrains how much high-LVR lending banks can do. This will allow banks to continue some high-LVR lending to some borrowers. From1 October 2013, banks will be required to restrict new residential mortgage lending at LVRs of over 80 percent (deposit of less than 20 percent) to no more than 10 percent of the dollar value of new residential mortgage lending. So far so good, the Reserve bank is stepping in to the mortgage market with a heavy hand and along the way causing much concern among those who wish to buy houses. This is where the real fun starts.
The public at large seem happy to blame the reserve bank and as they, the reserve bank, are a government department, the critics are happy to blame the government for this situation. For example this is how the ANZ ‘apologised’ for the imposition of the LVR “The restriction on high LVR loans is not something ANZ has decided to do. The Reserve Bank of New Zealand (RBNZ) has imposed these restrictions on New Zealanders through registered banks. These restrictions are part of a policy to reduce house prices and protect against the risk of a significant drop in house prices. Because of this, ANZ must reduce the proportion of new lending with an LVR of over 80%. (ANZ WEBSITE). So in effect the ANZ was not prepared to limit the exposure to high risk lending unless the reserve bank told them to. For many it seems that in the Auckland area at least the prospect of owning a home in the area they want is fast becoming unrealistic. But not to worry the BNZ is there to help. As they say in their publicity ”The Reserve Bank is concerned that the housing market poses a growing risk to New Zealand’s financial stability. The Reserve Bank believes that these new restrictions will support the stability of the housing market. (BNZ WEBSITE). Again, it is not the BNZ that has recognized this risk, but rather the reserve bank that has been telling the story. These are not altogether reassuring statements coming as they do from two very large experienced trading banks. There are some hints, even in the PR from the ANZ and the BNZ that the reserve bank had no option. Put bluntly the reserve bank is charged with ensuring that the banking industry is stable and by inference ensuring financial stability.
Nevertheless, commentators as diverse as the unions, the Labour party and property investors are all decrying this policy – for the same underlying reason; those with a low deposit will not be able to enter the market. There seems to be a case of collective amnesia afoot. Just over five years ago a well-known bank, Lehman Brothers ceased to exist and in its collapse opened a can of worms that we now call the GFC – the global financial crisis. During the fallout from the GFC one of the more interesting things to emerge was the amount of low LVR lending was being conducted. In some cases such practice was given the name a NINJA loan for No income, no job, no assets applicant. In many cases deposits of less than 10% or even 5% were found to be the normal state of affairs. At the time I can remember statements like “how can the banks be so stupid” yet here we are again. It is because the trading banks have a demonstrable inability to self-regulate in relation to high risk mortgage applications that the reserve bank has had to step in. If any institution is to blame for the LVR regulations it is the banks themselves. Rather than point the finger at government or the reserve bank, maybe questions should be asked about the innate greed, or lending practices of the banking industry that resists the LVR regulations. Again it is worth pointing out that in at least one instance a bank was pointing the finger at the reserve bank. Remember also – it was their preference, the banks, to continue to offer as many low LVR loans as they saw fit. We should be grateful that we have a central bank that is capable of managing where the banking industry is not.
Dr Andrew Cardow