In wake of Bank of England talk of limiting mortgage to income multiples, RBNZ points to May 2013 comments that it may look at debt servicing limits in future

By Bernard Hickey

The Reserve Bank of New Zealand said in May 2013 it may look in the future at the case for limits on debt-servicing capacity in its macro-prudential toolkit.

The renewed focus on capping mortgage to income multiples followed comments by the Bank of England's new Financial Policy Committee on May 19 that it may force banks to include interest rate stress tests in their affordability tests for customers.

The Bank of England noted the share of mortgages worth more than four times income had risen to a record high this year. The Bank of England is set to release its half yearly Financial Stability Report on June 26 that may include such tests. Earlier this week, British house prices hit fresh record highs and are up 11.1% from a year ago.

Also earlier this week, the Royal Bank of Scotland became the second British bank in two weeks to cap mortgages for more than £500,000 at no more than four times income, following a similar move by Lloyds Bank last month, the Telegraph reported.

Stuff reported today that the Reserve Bank had not ruled out capping mortgages as an option.

A Reserve Bank spokesman pointed to the Reserve Bank's May 2013 final policy position on its macro-prudential policy, which included the high LVR speed limit imposed in October 2013, sectoral capital requirements, adjustments to the bank's existing Core Funding Ratio and a Counter Cyclical Capital buffer, which has yet to be used.

Page 10, Paragraph 49 refers to areas of regulation that were "not in scope" for the "base framework", but "may form part of the bank's future work programme." It included: "the case for incorporating debt-servicing capacity into the macro-prudential framework."

'Focus on supply side'

Economic think-tank The New Zealand Initiative said said it was concerned about the report and opposed such mortgage controls.

“To counter high and rising house prices, particularly in Auckland, tools to curb mortgage lending are the wrong way to go," said NZ Initiative Executive Director Oliver Hartwich.

"We need to tackle the underlying issue of housing supply if we are serious about housing affordability. In any case, it should be left to commercial lenders to decide whom to lend to and how much," Hartwich said.

He referred to the think tank's reports on freeing up land and housing supply.

"The research showed that countries with a flexible housing supply side typically avoid the affordability problems faced by New Zealand. In contrast, demand side interventions such as loan-to-value ratios or income caps can at best provide temporary relief but do not offer a lasting solution to long-term housing pressures," Hartwich said.

"Moreover, direct controls on mainstream financial intermediaries always have unintended and undesired consequences, including disintermediation," he said.

'Government action required'

Meanwhile, Labour Finance Spokesman David Parker and Housing spokesman Phil Twyford called for stronger action on housing to avert Reserve Bank action to cap mortgages at 4.5 times incomes.

“This could mean an Auckland family on a median income subject to an 80 per cent LVR could only buy a home of around $400,000, over $200,000 less than the median price of an Auckland home," Twyford said.

“That would shut out many more of the first home buyers who weren’t already locked out by LVRs, creating a generation of renters. Not only would it be the end of the home ownership dream it would be a speculator’s nirvana," he said.

“If the Reserve Bank chooses cap mortgage rates it will be the Government’s fault because it has not taken the actions necessary to address both speculator-driven demand and the shortage of affordable houses. This is exactly what happened with LVRs. The Reserve Bank was forced into a corner by the Government’s inaction. It’s déjà vu all over again."

Parker pointed to Labour's proposals for a capital gains tax, to build 100,000 houses in 10 years, and restrictions on "foreign and domestic speculators" as solutions to the housing problems.

“National’s refusal to deal with housing, capital gains, universal KiwiSaver, migration effects and monetary policy is hurting first home buyers and the wider economy," he said.

BNZ's Healy comments

Late last month Gareth Vaughan spoke to new BNZ CEO Anthony Healy in a Double Shot interview about the talk of mortgage caps in Britain and whether they should be introduced here.

"I think you have got to be careful when you start imposing lots of micro regulatory tools into a banking system," Healy said. "Because one of the things that is a real strength of our banking system is the core risk management practices at the banks, their innovation, the way that they continue to invest in the sector and bring new products to our customers."

"So the more you regulate their activities the less innovation you get over time, and the less attractive that sector will be for capital. And therefore you could risk starving that sector over time," Healy said.

"I'm not sure that picking an arbitrary number of four or four and a half times salary and saying 'that's the highest you can lend to' is; A) a call that a government should make, or B) the right number. I think it's a bit arbitrary."

"Our models are much more sophisticated than that. We look at house prices obviously, we look at leverage, we look at income levels. But also what people spend, what their other income sources are, what their likely increases in salary (are) over time. So I think you have got to be careful when you over regulate this stuff," said Healy.