By Bernard Hickey
What if a policy designed to deal with the effects of a housing supply shortage actually worsen that shortage?
That's the sort of unintended consequence that may be emerging from the Reserve Bank's 'speed limit' on high Loan to Value Ratio (LVR) lending.
Master Builders Association Chief Executive Warwick Quinn told me this week that some of the builders who supply 40% of New Zealand's new homes have seen a noticeable slow-down in orders from low deposit buyers in the last 10 days.
He cited one builder who usually built 60-70 homes a month and had taken orders for 12 houses the week before the Reserve Bank's 'speed limit' announcement.
In the week after the announcement orders slumped to just one.
Another lender specialising in loans for construction saw his new loans fall from 6-7 loans a day to just one immediately after the August 20 announcement.
Quinn says it's still early days and the anecdotal evidence may turn out to be a blip, but he is now surveying his members over the next three to four weeks to find out what has just happened.
He has also raised his concerns with the Reserve Bank and is worried the speed limit could reduce the supply of new houses, making the Reserve Bank's job even harder.
"It's counter-productive for the policy," Quinn said.
No one is really sure just how many new homes are bought by low deposit borrowers and first home buyers in particular. Quinn thinks it might be around 15%, although the Reserve Bank thinks it might be closer to 10%. Some builders of more affordable homes have up to 50% of buyers who are high LVR borrowers.
Given about 20,000 new homes are being built each year at the moment, the speed limit has the potential to reduce the number of homes by about 3,000 a year.
"If it's all in Auckland then that's really counter-productive for the policy," Quinn said.
A fall in new home building would also complicate the government's housing strategy.
Finance Minister Bill English defended the Reserve Bank's speed limit this week, saying it was necessary for financial stability. He argued the government's moves to increase housing supply would help first home buyers, even though he cited Reserve Bank advice that the speed limit could force as many as 8,000 first home buyers to delay or downsize their home buying plans.
But if the very policy designed to control house price inflation contributes to it by restricting housing supply then the government has as big a problem as the Reserve Bank.
One factor driving economic growth at the moment is a surge of construction in Christchurch and Auckland.
Quinn would like to see first home buyers building new homes to be exempted from the speed limit.
The Reserve Bank rejected John Key's pleas for an exemption for all home buyers, but it may be more open to one that increases housing supply.
It commented in a bulletin paper this week that its policy is a moving feast and it is open to tweaks.
It may have to get tweaking if the anecdotes are confirmed with harder evidence.
This piece was first published in the Herald on Sunday. It is used here with permission.