Governor Graeme Wheeler says RBNZ to review LVR 'speed limits' criteria and implications next month

Governor Graeme Wheeler says RBNZ to review LVR 'speed limits' criteria and implications next month
Graeme Wheeler.

Reserve Bank Governor Graeme Wheeler has used a speech to an international audience to talk up the central bank's policies restricting banks' low equity mortgage lending and forcing them to use more deposits and longer-term wholesale money for funding.

Wheeler also dismissed the idea of capital controls as rarely being a desirable option for open economies like New Zealand's.

Wheeler was speaking at a Bank for International Settlements conference on cross-border financial linkages in Wellington.

He reiterated what Reserve Bank Deputy Governor Grant Spencer told interest.co.nz in July, in that restrictions on banks high loan-to-value ratio (LVR) residential mortgage lending will be reviewed, along with their implications, in next month’s Financial Stability Report. The report's due out on November 12.

"While LVRs have a financial stability goal, they have been an important consideration in our monetary policy assessment. We believe the dampening impact of LVRs on house price inflation and credit, and the diminished ‘wealth effects’ on spending associated with it, have reduced consumer price inflation pressures by an amount similar to a 25-50 basis point increase in the OCR," Wheeler said.

"In essence, the reduction in housing pressures allowed us to delay the tightening in interest rates, thereby reducing the incentive for any additional capital inflows into the New Zealand dollar in search of higher yields."

"We have seen little financial sector disintermediation to date, and have indicated that the LVR speed limit is not intended to be permanent. It will be removed once housing market pressures have moderated and when we are confident there will not be a resurgence in house price inflation. We will be reviewing these criteria and their implications for LVR restrictions in next month’s Financial Stability Report," added Wheeler.

The 25-50 basis points impact on the OCR is in line with what Spencer said in March when he said the LVR restrictions were worth up to 50 basis points of OCR hikes. Prior to that the Reserve Bank had said the presence of LVR restrictions would mean that the OCR would need lifting by 30 basis points less than would otherwise be required.

The Reserve Bank has increased the Official Cash Rate four times this year by a combined 100 basis points to 3.5%. It next reviews the OCR next Thursday, October 30, but most economists expect the OCR to remain on hold well into 2015.

Wheeler noted the LVR restrictions, introduced on October 1 last year, led to a significant reduction in high-LVR lending, a decline in house sales, and fall in house price inflation.

"While other factors, such as subsequent interest rate increases over the period March 2014 to July 2014 are also helping to constrain demand, annual house price inflation fell from around 10% to 5% currently, despite high levels of net immigration," he said.

Banks must limit high LVR lending, defined as LVRs over 80%, to an average of no more than 10% of their mortgage commitments. (See more on the LVR "speed limits" here).

"Vulnerability of NZ banks to problems in offshore wholesale funding markets substantially diminished'

Wheeler also talked up the success of the Reserve Bank's core funding ratio (CFR), which was introduced in April 2010 to help wean New Zealand's big banks off shorter-term overseas wholesale borrowing. The CFR requires a minimum proportion of total bank lending to be funded by more stable "core funding" instruments such as retail deposits and long term borrowing of more than one year.

"In New Zealand, the commercial banks’ core funding ratios fell to around 60% prior to the Global Financial Crisis. Today the banks’ core funding ratios stand at around 85% against a minimum (requirement) of 75%, and the vulnerability of New Zealand banks to developments in offshore wholesale funding markets has been substantially diminished," Wheeler said.

On the broader issue of cross-border financial integration, Wheeler said there was much more to this than capital flows.

"It also embraces trade linkages, incipient flows, remittances, price arbitrage, and risk transfer instruments. In its broadest form financial integration offers enormous benefits, particularly when it finances efficient resource allocation, smoothes consumption, and distributes and diversifies risk. It is especially important when linked to the global transfer of skill-enhancing technologies, and the financing of innovation and catch-up technologies."

Nonetheless he said cross-border flows can present challenges for monetary policy and financial stability.

"Cross border financial linkages can present difficult challenges for monetary policy for two main reasons. First, although the exchange rate is often the primary transmission channel for monetary policy, this channel is often stronger than we would wish. Second, and just as problematic, we often do not know what factors are driving the exchange rate and how efficient this transmission channel is," said Wheeler.

"In an economy with an open capital account, with active arbitrage it is possible to have either a stable exchange rate or an independent monetary policy capable of delivering price stability."

"Like New Zealand, many of the Asian economies have experienced an appreciation in their real exchange rate in recent years. In a floating exchange rate environment, this lowers inflation in the tradables sector and raises the real disposable incomes of many consumers. It also makes it cheaper for firms to acquire imported capital goods and new technologies, and can spur greater innovation and productivity in the tradables sector," Wheeler added.

"However, large swings in the real exchange rate impose significant adjustment costs for firms that are forced to exit and re-enter markets due to large movements in competitiveness. And it can generate particularly difficult headwinds for those export producers not experiencing high prices for their products, and for firms competing against cheaper imports."

An important issue for policy makers, he said, is whether the appreciation in the real effective exchange rate is justified and sustainable.

"A real effective exchange rate is unjustified when its level is inconsistent with the economic factors (such as commodity prices, economic growth, interest rate differentials) that can normally explain its movement during the business cycle. The level of the real effective exchange rate can be considered unsustainable when it is clearly deviating from its long-run equilibrium at the level that it would be expected to settle when business cycle factors have fully dissipated. In such a situation, persistent deviations from equilibrium are likely to result in external debt ratios that become unmanageable and cause misallocations of resources that can inhibit the country’s long term growth potential," said Wheeler.

'Capital controls seldom a desirable option for countries with open capital accounts'

And, he said, domestic monetary policy and changes in exchange rate regimes can't do much to alleviate an overvalued real exchange rate.

"New Zealand has tried a variety of exchange rate regimes over the past 40 years – including a fixed exchange rate, crawling peg and floating exchange rate. However, the medium-term level and volatility of our real effective exchange rate has been largely unaffected by the type of exchange rate regime in place," Wheeler said.

"Often the appropriate policy response lies with measures to reduce demand pressures, or improve competitiveness and raise potential output growth. Such measures might include a better balance of fiscal policy, addressing impediments that distort saving and investment decisions, and undertaking reforms that raise productivity and improve competitiveness. They might also include prudential policies that address rising vulnerabilities directly."

He noted commentators such as the International Monetary Fund have suggested capital controls might play a role.

"But this is seldom a desirable option for countries with open capital accounts. An open capital account provides powerful incentives for improving productivity as it signals to domestic producers that they need to be competitive if they wish to attract capital and financing domestically and from offshore," said Wheeler.

"Opening the capital account is therefore one of the most powerful economic reforms that a government can undertake. This is partly because of the benefits of the policies that are usually pre-conditions for removing capital controls. Such pre-conditions include achieving a reasonable degree of economic stabilisation, some liberalisation of the domestic financial market, and lower border protection so that domestic savings do not flee offshore from a highly protected domestic capital market, and offshore capital does not flow into domestic sectors with high effective rates of protection."

You can see Wheeler's full speech here.

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Just one question for Mr Wheeler , if CPI is only 1% , why is the OCR so high?
My observations are :-

  • It feeds into very expensive mortgages and as a result homeowners are paying too much for domestic money .
  • Foreigners are using cheap money from their home countries to buy up real assets , crowding out locals
  • It also gives investors an inflation adjusted real return better than anywhere else in the OECD .  
  • It pushes the currency to damaging levels.
  • And we all get punished

Kiwis are being led like lambs to the slaughterhouse by the current Monetary Policy settings .

Bah, the guy is going to just spin everything around justifying his bad position on blocking FHB buyers out of the investment market in Auckland.  Arse covering of the worst kind.

Wheeler has just issued the longest apology in recent hisotry to excuse his failed LVR regulations.

Rubbish, he's just laid out that your un-realsitic expectations of large un-earned capital gains for next year has gone bye bye.
The LVR has cleared worked IMHO, though maybe too agressively for the RB.
regards
 

In what sense have they failed Big Daddy? Based on what the RBNZ wanted them to achieve they're working - http://www.interest.co.nz/opinion/72215/opinion-year-their-controversial...

Gareth, your article link states the RBNZ wanted to achieve the tollowing...."the LVR restrictions would lower house sales by 3-8%, house price inflation by 1-4 percentage points, and housing credit growth by 1-3 percentage points over the first year the restrictions were in place".........
......and while the RBNZ can try and justify their reasoning until the cows comes home.....I see the LVR's as highly descriminating against many people.............then there is the issue that off-shore owners have not been subjected to the same rules as locals!!!......
 
The fact is the RBNZ could have implemented an LVR across the board.....all home mortgages must have e.g. 90% or 95% or 99% LVR regardless of whether you live in NZ or invest in NZ fromTimbuktu!.....they had plenty of time to come up with something half pie reasonable and fair......and could have given home owners a period of time to get to the required LVR setting.
 
The fact is the RBNZ have completely screwed up.....the most rediculous set of goals....lower the volume of sales, ensuring price inflation between 1 - 4% while keeping house credit growth between 1 - 3 percentage points.....go buy a corner dairy Mr Wheeler and do your practising there before screwing with the people who just happen to be by age or otherwise caught up in your mismanagement.  While your practising in your corner dairy.......take the products on isle 1 (pretend that is Auckland)put your cigarettes, booze, bread, glossy magazines of real estate and banking advertising there.....isle 2 can be Christchurch........everything fell off the shelves and broke so you have an insurance claim on that isle and everyone wants what was on that isle......tents candles, water, lawyers, rope to hang the bureaucrats with....I mean tie the tarpaulins on with......then break out into the regions on the rest of your isles.......good luck Mr Wheeler....I think you're going to need it.......cos notaneconomist is coming back next week and she's going to play head of the RBNZ.........aw...goody I'm looking forward to this!!!
 
Now more about why accuse them of descrimination.
Bill of Rights Act 1990

19 Freedom from discrimination

(1) Everyone has the right to freedom from discrimination on the grounds of discrimination in the Human Rights Act 1993.
While the Human Rights Act 1993 outlines the grounds on descrimination the following Misc provisions under the Bill of Rights Act protects all other existing rights and freedoms......and for some reason every Government and it's Agencies fail to rcognise Sect 28!!!

Part 3
Miscellaneous provisions

28 Other rights and freedoms not affected

  • An existing right or freedom shall not be held to be abrogated or restricted by reason only that the right or freedom is not included in this Bill of Rights or is included only in part.

 

And what happens with these clauses, when it is the RBNZ dictating who can or can't buy the interest in land, housing and other accommodation and what of the terms being less favourable when 10% or less must have a 20% deposit on a particular house yet others can borrow 100% for the same house......the RBNZ dictates to the banks...who then have to dictate to some borrowers but not others. The RBNZ are indirectly denying the right to occupy and they are not treating all people seeking to acquire an estate or interest on the same favourable terms offered to others.

Human Rights Act 1993

Discrimination in provision of land, housing, and other accommodation

53 Land, housing, and other accommodation

(1) It shall be unlawful for any person, on his or her own behalf or on behalf or purported behalf of any principal,—
 

  • (a) to refuse or fail to dispose of any estate or interest in land or any residential or business accommodation to any other person; or
  • (b) to dispose of such an estate or interest or such accommodation to any person on less favourable terms and conditions than are or would be offered to other persons; or
  • (c) to treat any person who is seeking to acquire or has acquired such an estate or interest or such accommodation differently from other persons in the same circumstances; or
  • (d) to deny any person, directly or indirectly, the right to occupy any land or any residential or business accommodation; or
  • (e) to terminate any estate or interest in land or the right of any person to occupy any land or any residential or business accommodation,—

by reason of any of the prohibited grounds of discrimination.

(2) It shall be unlawful for any person, on his or her own behalf or on behalf or purported behalf of any principal, to impose or seek to impose on any other person any term or condition which limits, by reference to any of the prohibited grounds of discrimination, the persons or class of persons who may be the licensees or invitees of the occupier of any land or any residential or business accommodation.

 
 
So while we have the prohibitive grounds of descrimination surely Sec 28 of the Bill of Rights Act provides clarity in that an exsting right or freedom is not abrogated or restricted by reason only that the right or freedom is not included in this Bill of Rights or is included only in part........does this not mean that all people have the same protection of their rights and freedom on an equal basis???

However it pretty much looks like the LVR has indeed been successful in its effect, maybe too much so.
and really its prefectly OK to put regualtions in place to ensure stability of the economy.
regards

The only thing the LVR has been effective in is undermining constitutional rights and democracy.....if you want to ensure a stable economy then you must ensure that the basics for human life are met e.g. housing....so putting in any regulation that undermines any basics is foolish behaviour lacking in any maturity in thinking on all levels!!!
 
The economy is the people....not the bureaucrats and regulation.....and if you think that interference via regulation in manipulating the natural market mechanisms offers stability you have been fooled.....only a few players benefit from this kind of interference!! This is how the wealthy get wealthier and the poor get poorer!

No, I also have rights, its stops fools taking on crazy risks I could well end up paying for.
regards

Way more stability than not....
regards

If they had to use the LVR tool then it should have been a broad blanket approach.....the current LVR policy is highly descriminating and didn't capture all households equally.........or fairly!!!  This LVR policy has had nothing to do with what the RBNZ has stated it was meant to do......
 

No, the LVR does exactly what its meant to do in the method it does. It targets the start of the leverage ponzi monster at the very ppl who are the biggest risk to the system/economy because they are over-leveraged.
regards

If you read Steve Keen even small % changes have a huge effect, hence 30% would be devistating, if 20% hasnt already been so. 
70% ownt slow it it will destroy it....assuming there isnt that much easy money flowing in from abroad to compensate that is...ie all else being equal).
Frankly I think if we dont drop the OCR and soon deflation is what we are going to have.
regards

Wheelers regulations have failed dismally in that
(a) Prices have continued to rise rapidly.
(b) Have locked first home buyers out of the market unkess they build new (plus 15% GST) .
(c) Have increased the number of property investors who now own one third of the country's homes to the detriment of FHB.
(d) Will force people to spend more on rent than ever before and for longer.
(e) Have skewed the figures for sales as people with 20% equity now have less competition
(f) Have forced many to use loan sharks and dodgy money lenders to get around the regulations.
(g) Have given foreign investors a wide open field.
(h) Are hurting the wrong people - the vunerable and the poor.
(i) Has put greater strain on social housing.
Want more?

Agreed, we need a new policy initiative. How about a land tax of (say) 3% of capital value? You could make first homes exempt. This could decrease land values, encourage property investors to sell, make homes more affordable to the  vunerable (sic) and the poor (whom I know you are concerned about) and raise taxes which could be reduced elsewhere.
Win, win, win, unless you are a property investor. Or a bank when their over-leveraged clients start to go bust, but they were prepared to take that risk.

If BigOlly doesn't like it you can absolutely be certain it is good policy (3rd law of ponzidynamics)

Home owners in Palmerston pay 6.5% interest on their homes which are decreasing in value due to tight monetary policy in NZ, while foreign buyers pay 1% interest while buying Auckland property.  
How does the Palmerston mortgage holder paying high interest rates suppress Auckland prices? 

Two questions:
-which country has 1% mortgage rates that invest here?
- does that foreign investor incur foreign exchange risk in borrowing in foreign currencies and investing here?
 if the answer to the last is yes, third question:
- based upon the past history of both local and offshore investors borrowing in foreign currencies to invest here, what range of potential funding costs could he/she end up with?
 Thank you
 
 

Grant A (Banking Industry Advocate)  - you have avoided the question:
How does the Palmerston mortgage holder paying high interest rates suppress CPI / Inflation / Auckland house pices?
Many foreign investors are raising finance on property in their own country or using savings -  and so driving up Auckland property prices. Is the Govt and RBNZ and banks really acting in the best interests of their citizens by allowing rampart Auckland city prices fueled by open  doors property purchasing while at the same time inflicting the worlds highest  interest rates (in devt world) on wage earners/home owners?
By the way: have you noticed mortgage interest rates have been dropping?  -  on global influences.   Have you noticed that there is a World outside of NZ?   What is happening economically outside of NZ?  Any Hiking going on? 

I was not asked a question, you made a statement in a post, and I asked you three questions about it, none of which you've answered - your answer is always to avoid the question, and question back instead, and because most give up trying to get the answer from you, let you  carry on making  unsubstantiated statements that few now bother themselves with challenging. And don't bother answering these ones either now, I knew you had no ability to do so, I was just interested to see if you'd actually attempted to, but as usual......

Interesting ZZ, maybe you go back and look at my posting and tell me where I said there were no 1% rates in the world?  My impression of Singapore was that their rates were in the 1.25 - 2,5% range but thanks for the Googling but its irrelevant to my questions

They were questions structured to reach a conclusion based around the statement he was making that foreign buyers were effectively funding at 1%. The world is addicted to cheap money so 1% interest rates are quite possible, but I have no interest in that other than establishing that he would be borrowing in a foreign currency, so lets call it SGDs.
But yes I do know the answer to no. 2 and therefore know that no.3 also applies. So if you're answering for him,  please complete the answers or leave it to him.
 

There's so much wrong it that posting I will leave you to it. You have no understanding of what risk is ZZ, it something happening that's not expected....there is considerable risk to any investor, without a natural hedge, in borrowing in one currency to fund an asset in another currency. If everything happens as we expect them to then there's zero risk always....in the next breath on another repost you'll be claiming an iminent collapse of the NZ economy and the currency to suit some other inane argument you will have..it won't be with me, and I suspect most.

Grant A
Q: do foreign investors incur foreign exchange risk in borrowing in foreign currencies and investing here?
 
A: They dont care
 
The foreign exchange risk is viewed as simply the cost of an insurance premium

Listen to the following interview
 
Significant Investor Programs
Canada and Singapore have shelved their programs and the United States just has already reached its quota for the year. So there are not many other options available for investors, especially Chinese investors, who simply want security. Many Chinese investors see Australia (and New Zealand) as a safe haven during this period of economic and political uncertainty in China. And you can never charge too much for a life insurance policy. 
http://www.businessspectator.com.au/article/2014/10/23/australian-news/how-chinas-richest-will-fund-australian-innovation

iconoclast - the ignorant never care until it bites them in the arse.  I had  plenty of experience with those types starting from the 80's foreign currency domestic borrowers, and over subsequent years, with some onshore ones. Some are luckly (and then think they know it all), others took an absolute bath such that their effective borrowing costs were horrendouS.
 
There are plenty of potentially fantastically profitable strategies that we can all take with investments if you can say to yourself you don't care about the risk. A great many of the ones that don't care about the risk, and get if wrong, inevitably gift back some very cheap assets to NZers at some point.

"But this is seldom a desirable option for countries with open capital accounts. An open capital account provides powerful incentives for improving productivity as it signals to domestic producers that they need to be competitive if they wish to attract capital and financing domestically and from offshore," said Wheeler.
Really...????     I dont think I agree with that....
Most of the global capital flows seem to be a function of the carry trade.....  where cheap foriegn money simply chases hiher returns....
It is a function of the financial economy ....NOT...the productive economy...
In my view