The Reserve Bank's 'speed limits' on high loan-to-value lending might end up having a bigger impact on house price inflation during their first year of implementation than the RBNZ originally predicted.
In an analytical note examining how the LVRs have affected the housing market so far, RBNZ senior economic analyst Gael Price said it was "possible" based on results so far that the effect on house price inflation could be greater than the 1-4 percentage points originally estimated.
The analysis has been conducted by comparing the actual performance of the housing market against the "counterfactual scenario", worked out by the RBNZ as to what would have happened in the absence of the LVRs.
RBNZ Deputy Governor Grant Spencer has previously said that over their first six months, the LVR restrictions have had a dampening effect on housing that was "broadly in line with expectations".
Price said the estimated counterfactual scenario suggested that, in the absence of the LVR policy or any other housing-specific shocks, house price inflation could have been 3.3 percentage points higher and household credit growth could have been 0.9 percentage points higher (on an annual basis to March 2014).
"The LVR restriction is the most likely explanation for that result."
She said the estimated effects in her analytical note were in line with the original RBNZ estimates.
"That [original] analysis showed that, over the first year, house price inflation was likely to fall by 1-4 percentage points, and credit growth by 1-3 percentage points.
"As both [those] variables may decline further in the current analysis, it is possible that the effect on house price inflation by the end of the first year may be somewhat larger than originally predicted.
"However, the first six months after implementation probably represent a transitional period, during which market participants may have reacted quite rapidly to the policy.
"As participants grow accustomed to the new policy environment, it is possible that housing market activity could rebound somewhat, leading to smaller effects over the first year than those implied by the analysis in this paper."
The RBNZ admitted earlier this week that the 11% fall in house sales seen around the country since introduction of LVRs up till March was larger than original estimates.
Price said the large fall may have arisen from a rapid reaction to the policy by market participants, as had been seen with the banks (in aggregate) complying with the high-LVR ‘speed limit’ several months before they were required to.
"It is possible that house sales may recover as the market adjusts to the new policy regime, especially if banks make more use of exemptions, as was initially expected."
She said household credit growth had responded quite slowly to the weaker housing market, partly because there was a lag of several months between the sale of a house and the corresponding housing loan being drawn down.
"Credit growth is likely to fall further below the counterfactual scenario in coming months, based on the decline in activity already seen," she said.
Price said the framework of her analytical note was "one way of assessing the impact of the LVR restriction over the initial adjustment period".
"The analysis relies on the assumption that the LVR restriction is likely to been the biggest source of shocks within the housing market itself (as distinct from non-housing sector shocks such as changes in net immigration) over that period.
"In order to assess the effects of the LVR policy beyond the near term, it will be necessary to explicitly separate LVR-related developments from other influences on the housing market," she said.
3 Comments
The market was cooling already. The rate of change in seasonally adjusted housing turnover had already peaked and had even started to decline prior to the introduction of the LVR. While its had an impact, it would be disingenuous to attributable all the decline to it, as we would have gotten there soon on trend, anyway.
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