Opinion: Only an actual fall in house prices will save the RBNZ's high-LVR policy

Well, what about that Graeme Wheeler then, eh?

Turned out to be a bit of a one, he did.

Yeah, he's the Grinch who would pinch the Christmas lights off the house and then prevent anybody from being able to buy the house. That's our Mr Wheeler.

You can just see him sitting in his ivory tower at number two The Terrace, in his black cape, black top hat, twirling his black moustache, thinking of the next dastardly thing he could do.

Of course most young kiwis aspiring to buy a house in the very near future would think that the Reserve Bank Governor has already done more than enough with his positively evil "speed limits" on high loan-to-value lending.

Yes, the mission to single-handedly rob the country’s young and aspiring of their birthright - their absolute entitlement - to own their own little patch of the universe (also known as a house) is well under way.

And boy, the nefarious scheme seems to be succeeding.

The RBNZ released figures last week showing that the rate of high-LVR lending had more than halved in just the first month since the October 1 application of the speed limits. This followed the more anecdotal evidence from the latest BNZ-REINZ Residential Market Survey, which showed that first home buyers have deserted the housing market in droves.

So, that's the evidence for the prosecution. It's time for the fair trial, followed by a damn good hanging.

Now, no doubt Wheeler will pull out the excuses he's tried before. He's even looked quite sincere when patiently rebuffing television reporters at press conferences with the same sort of lines and refusing to talk directly to his young victims, thus robbing the tv channels of the opportunity to run ratings bonanza: "The RBNZ Governor brazenly tells you to your face why he won't let you buy a house" stories.

But, one suspects those trial-by-media opportunities will come. The momentum is gathering.

Auckland mortgage broker John Bolton - someone who's on the front line and therefore should know exactly what's going on - reckons that the RBNZ will come under huge pressure on its LVR policy by March next year.

The scene is well and truly set. We've got a Government that agreed to giving the Reserve Bank power to introduce LVRs as part of new macro-prudential tools but then wanted to exempt first home buyers and when it didn't achieve that announced some initiatives aimed at partially getting first home buyers around the LVR limits.

Then we've got strong lobbying pressure already coming from the building industry itself.

The John Key Government has not appeared scared of anything - certainly nothing a lacklustre Opposition can muster. But the LVR limits scare it. Oh yes.

Emotional attack

Young people not able to buy houses has huge emotional impact. And the young people are voters. And they have parents and friends and other extended family that vote. And next year is an election year.

The National Party is already distancing itself at a speed of around a million kilometres an hour from the LVR policy. But that has worked only to a point and will probably stop working altogether come next year. After all - this Government did sign the paper that allowed the dreaded LVRs.

In the meantime this is very much a developing story.

In some respects it has been a shock to see how quickly the banks have been able to bring their portions of high-LVR lending down. But of course adhering to the letter and spirit of the rules is a condition of their continued registration as banks - so therefore they take it seriously and can be seen to be doing exactly the correct thing.

Personally, if I was a bank faced with a policy (LVRs) that I deeply disliked and wanted rid of I would go to the letter of the rules and beyond. What I would do is basically knock all high-LVR lending on the head and go all-out for the 'good stuff', the property investors et al that fall into the low-LVR category. 

Bells and whistles

Yep, I would offer all the bells and whistle and sweetheart deals to get the business of the investors. In such a way I could hope to keep my overall lending increasing - and I could blame the RBNZ for having to turn away young first home buyers. A brilliant excuse. And not only would it be a brilliant excuse, the consequences of such action would just keep ramping up the pressure, probably first on the Government, but then back on the RBNZ to get rid of these hideous limits. So, by apparently diligently applying the toxic new rules I could actually hasten their demise. That would be my plan, if I were a bank.

The whole idea of having limits forced on banks must be truly an affront to them. After all, it implies that the banks don't have the necessary discipline to decide if their lending policies are dangerous. And as we know, banks are always completely in control of the situation. Until they are not.

You see, blissfully lost in all the mounting LVR hysteria is the fact that we do, relative to earning power etc, have very expensive houses in this country. There is, therefore a real risk that a shock to the housing market could cause prices to plunge, and put huge numbers of people in the poor house, doing goodness-know-what to the finances of the banks in the process.

This Government is surely aware of the risk, as have previous Governments been, as are the Opposition parties. But owning houses is so fundamental to the New Zealand psyche that no Government is ever going to itself tackle policies (and I won't trot out all the options) that aim to level the investment playing field and reduce our total dependence on housing wealth.

No, Governments leave housing investment alone. Messing with the housing investment market would be like trying to ban the All Blacks - virtually treasonous. An attack on the New Zealand people.

So, it has been left to the poor old Reserve Bank to try to get responsible on behalf of the country and possibly save ourselves from ourselves. And the Reserve Bank is by the minute being left completely out on a limb.

What happens from here?

Well, what does happen next then?

The key thing will be the housing market itself.

If house prices were to flatten or even ease a little in the New Year then this would take a huge amount of pressure off. After all, any first home buyer prevented from buying a house now and then finding that prices are cheaper in six months time is going to be pretty pleased.

But I doubt it will happen that way.

It's more likely that housing investors (and everybody wants to be one) will see now as the time to strike. And with banks fighting for their low-LVR business, they'll have plenty of chances to raise money and get in there and bid up (against fellow investors) the price of houses.

If the price of houses is higher in six months time than it is now - and I think it will be, even if only slightly - then the pressure will be intolerable.

No promises

Of course the RBNZ hasn’t promised cheaper prices. The main reason for the LVRs is actually to ensure financial stability, with the secondary hope that the measure will also take some pressure off prices - maybe making house price inflation between 1 and 4 percentage points less than it would have been otherwise.

But such detail will be lost on the public.

In reality unless we get a fall in house prices, the locked-out first home buyers will be looking at houses getting further and further out of reach and they will be screaming. And the Government will be listening.

One way or another the RBNZ and the LVR limits will be kneecapped. And yes, I would include the additions of exemptions such as for new houses and for first-time buyers as “kneecapped”, since such exemptions would water down any impact of the limits to make them effectively pointless.

Already this is looking like mission unwinnable for the RBNZ and its (I think extremely brave) Governor.

Preventing the unprovable

The RBNZ is in effect trying to prevent something from happening (a housing crash) that it will never be able to prove would happen - unless it does happen.

There will never be a point at which the Governor can turn around and say that policies brought in by the central bank saved us from a housing bust. After all, if you wake up in the morning and the world hasn't ended overnight, you don't immediately think: "The world didn't end". You carry on oblivious.

No, the possibility of a housing crash is one of those out-there suggestions that nobody's really inclined to believe till it actually confronts them. A bit like the prospect of the world’s financial markets collapsing. Completely unthinkable. Oh, hang on…

The RBNZ has attempted to do the right thing. The Government and the country as a whole ultimately won't let it continue trying to do the right thing.

But as I alluded earlier, such matters should not be left to the central bank. This is Government work. And until we've got a Government prepared to step into housing market investment as an issue, then the whole country continues to run a serious risk.