By Gareth Vaughan
Less than a month ago speculation was running hot in the media, and among some economists, that the Reserve Bank was poised to end to its "speed limits" on bank's low equity residential mortgages. As it turned out that speculation was misplaced.
How quickly things can change.
The talk has now shifted 180 degrees to the prospect of the Reserve Bank going back to its macro-prudential toolbox and fishing out an additional tool in 2015.
In recent days we've had Westpac's chief economist Dominick Stephens and ASB senior economist Jane Turner raise the prospect of the Reserve Bank introducing additional macro-prudential tools. And at interest.co.nz we've had Squirrel Mortgages' John Bolton suggest this too.
We know the Reserve Bank's working on plans to make banks hold more capital against loans to owners of multiple rental properties. Deputy Governor Grant Spencer has said the Reserve Bank is working on how to categorise a borrower as a residential investor, noting it could be based on the proportion of their total income that's coming from their investment portfolio, rather than the number of houses they own. This could make loans more expensive for property investors, and potentially harder to obtain.
This policy's likely to see the light of day in 2015. However, it's not a macro-prudential tool.
Aside from the LVR restrictions the three other tools in the Reserve Bank's toolbox are; The counter cyclical capital buffer, effectively banks holding more capital during credit booms; Adjustments to the minimum core funding ratio, increasing/altering the amount of deposits and longer-term wholesale funding banks have to use to fund their lending as opposed to shorter-term debt such as commercial paper. (Across NZ registered banks the core funding ratio is currently running at 86.3% against the minimum requirement of 75%). And; Sectoral capital requirements, or increasing bank capital in response to sector-specific risks such as in the housing or rural sectors.
But there's at least one other option not in the toolbox that the Reserve Bank may look at. That is introducing something to shore up borrowers' debt-servicing capacity.
In the Reserve Bank's May 2013 final macro-prudential policy position the central bank noted areas of regulation "not in scope" for the "base framework", but that "may form part of the bank's future work programme" included: "The case for incorporating debt-servicing capacity into the macro-prudential framework."
The Bank of England this year introduced a rule where no more than 15% of banks' new mortgages can be loans equivalent to more than four-and-a-half times a borrower's income. This move was especially aimed at the London market.
Although in its submission on the Ministry of Business, Innovation and Employment's Responsible Lending Code the Reserve Bank appeared lukewarm at best to the idea of strict debt-to-income limits, it was also unenthusiastic about LVR restrictions prior to Graeme Wheeler's day. Here's what the Governor's predecessor, Alan Bollard, thought of LVR restrictions.
Limiting the volume of credit in the economy
One local fan of the concept of debt-to-income limits is New Zealand Institute of Economic Affairs principal economist Shamubeel Eaqub.
"I would like to see a pragmatic approach in terms of thinking about maybe a loan-to-income ratio," Eaqub told interest.co.nz in a Double Shot interview.
"It limits the amount of credit available in the economy and the bank's still choosing who is good risk and who is poor risk. The second thing that I think would have a much bigger impact is actually getting banks to hold more capital, because again that will limit the amount of credit in the economy," Eaqub said.
"The final leg, which is probably the most painful, is raising interest rates. We've already see the Reserve Bank do that this year (four times) and we've seen that it has had a big impact in terms of provincial economies, the rural economy in particular and non-housing businesses. But if the housing market starts to take off again I don't think the Reserve Bank will have a choice but to clamp down pretty hard. Because we know that house prices are so detached from fundamentals a sudden slowdown could be really quite painful," Eaqub said.
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