By Bernard Hickey
Graeme Wheeler told us for the first time today what he thought of using Loan to Value Ratios (LVRs) to cool down a housing market without having to hike the Official Cash Rate.
He's not that keen on using such 'unconventional' tools, despite other very conventional banks such as the Bank of Israel, the Hong Kong Monetary Authority, the Monetary Authority of Singapore and Canada's Banking Regulator all choosing to use or extend the use of LVR limits this year to control bubbly housing markets.
Wheeler told us that even if he had these LVR limits he wouldn't use them at the moment. Watch the video above for the section of his first press conference where I ask him about LVRs.
In one comment he effectively undercut the warnings from the Reserve Bank's own Financial Stability Report aimed at cooling down increasingly loose housing lending by banks that is helping to fuel house price growth of 5-10% in Christchurch and Auckland.
The warnings were substantial and repeated. In the overview the phrase 'excessive credit growth' is used twice in two paragraphs.
Here's a sample: "Excessive credit growth could worsen housing market imbalances given that house prices appear over-valued on a number of measures."
And this: "The Reserve Bank is also developing a broader macro-prudential policy toolkit to help achieve this objective. At present, credit growth is still reasonably subdued, but the Reserve Bank remains alert to developments that might warrant macro-prudential intervention."
Wheeler was referring to a memorandum of understanding the Reserve Bank is formulating with the government over which so-called macro-prudential tools it should use and how.
But in the next sentence he suggested he wasn't that keen to use them, referring to how they tended to advantage first home buyers at the expense of existing property owners and residential property investors.
Wheeler is sticking with the tone he set in his first speech, which is that his job under the Reserve Bank Act is to target inflation of around 2% with the Official Cash Rate and that any macro-prudential tools are useful mostly to keep the banking system safe, rather than to help boost the power of interest rate policy. Wheeler also reiterated he is reluctant to intervene in the currency and use Quantitative Easing.
More Brash than Bollard
In short, Wheeler showed himself to be more orthodox in his thinking than the previous governor and more committed to pure inflation targeting -- more Brash than Bollard. He is clearly uncomfortable with the idea of using such 'unorthodox' tools as LVR limits.
That is a pity because all sorts of economic data is signalling the Reserve Bank needs to act to bolster the power of monetary policy and avoid another damaging asset bubble.
Wheeler himself pointed to figures in the report showing house prices still around 4.5 times median incomes, well above the 3 times seen in the 1990s and just below the highs of over 5 seen at the peak of the boom in 2008.
The report pointed to a significant easing of lending standards in home lending in recent months.
"Discussions with banks suggest that high loan to value ratio loans are now beginning to form a significantly larger share of new mortgage lending than has been the case for most of the period since the financial crisis," it said.
By warning about the risks and pointing to the evidence, the Reserve Bank is then undercutting its own message by saying it's reluctant to do anything about the risks.
And they are large risks.
House prices are surging in Auckland to record highs with volumes reported by Barfoot & Thompson up almost 50% in October from a year ago. This is sucking in capital, keeping the New Zealand dollar high and preventing the rebalancing of the economy. It risks repeating the housing and consumption boom that unbalanced the economy from 2002 to 2008.
It presents the risk that the Reserve Bank may have to hold back from cutting the Official Cash Rate to avoid further pumping up the Auckland housing market, or that the Reserve Bank is forced to hike the OCR to slow the market down. Either would damage the real economy.
LVR limits allow the bank to slow (or speed up) the housing market by using the tool rather than the OCR.
This is a tool used earlier this week by the Bank of Israel to cut its official rate without worrying it would further heat up an already hot housing market. Israel is limiting first home buyers to an LVR of 75%, existing home buyers to 70% and property investors to 50%. Canada has reduced its maximum loan to value ratio to 80% from 85%.
The new Governor is letting his entrenched orthodoxy blind him to a pragmatic solution.
His determination to say 'Look Ma, no hands!' could run the New Zealand economy off the road.