Our central bank's starting to resemble an eccentric scientist, with macro-prudential tools its chemistry set. The worry is that too many ingredients will get mixed together with unpredictable results, says David Hargreaves

Our central bank's starting to resemble an eccentric scientist, with macro-prudential tools its chemistry set. The worry is that too many ingredients will get mixed together with unpredictable results, says David Hargreaves

By David Hargreaves

There was something very familiar in the way the Reserve Bank Governor and Deputy Governor started talking up the merits of debt-to-income ratios at the press conference following release of the six-monthly Financial Stability Report.

It bore an uncanny resemblance to the RBNZ's actions in 2013 leading up to the introduction of 'speed limits' for the banks on the amount of money they could advance for high loan to value mortgages.

In May that year the RBNZ signed off on its new macro-prudential toolkit  in agreement with Finance Minister Bill English, which was contained in that year's Budget announcement. LVRs were included in that toolkit, but the RBNZ had appeared tepid on the idea of using them.

That changed quite quickly - certainly in terms of public comments anyway. In late May 2013 Governor Graeme Wheeler was suddenly extolling the virtues of LVRs in a speech in which he said that "...loan-to-value restrictions may help to reduce the actual supply of mortgage lending".

The official impost of a speed limit was announced by Wheeler on August 20, 2013, so a little under three months after the first clear utterances that suggested such a policy was on the cards.

So, we fast-forward to last week's FSR press conference and the 'we like debt-to-income ratios' coming from Wheeler and his deputy Grant Spencer.

Significance under-played

I think because those comments came out in the press conference rather than the FSR document itself, that the country's economists have horribly under-played the significance of them as a pointer to what will happen.

It's of interest to note that the release of the FSR document was the first such RBNZ document release done without a 'lock-up' for media and analysts beforehand. The RBNZ cancelled this longstanding - and I might say extremely useful practice -  following the leaking of information by MediaWorks from an earlier such lock-up.

I wonder if in this instance the RBNZ was concerned about how news of moves to debt-to-income ratios would be filtered into the marketplace if such news was contained in a document unceremoniously dumped on said marketplace at 9am in the morning and with market participants not having the chance of a sneak peek first. So, it could be that it was a definite strategy to issue a bland, vanilla FSR document - and then push the boat out further with the public utterances at the press conference.

ANZ economists seemed to be reasonably well onboard in their Market Focus this week with what I believe is the 'true picture' from that FSR, but others have not quite followed suit yet. And it wouldn't surprise me if we didn't see a follow-up public speech by one of the top people at the RBNZ within a week or two to more strongly back up what was said at that press conference.

The pattern repeats

The pattern is almost identical to what happened in 2013. We've had the RBNZ being coy previously about debt-to-income ratios - as it was once about LVRs - only to now turn around and give clear indications that these ratios are very much on the table.

It took three months from the first public utterances on LVRs to the announcement of them. It might be similar this time - though there is the complication that at this stage debt-to-to-income ratios are not yet in the macro-prudential toolkit, so would have to be signed off by the Government first.

I don't think it will be the problem with the Government that some are making out. I don't for a moment think the Government was thrilled about the impost of LVRs either, but it went along with it.

In actual fact, the Government can nicely step aside, shrug its shoulders and say that the RBNZ as an independent body has the right to do what it thinks best. In essence, the Government can at least attempt to wash its hands of the introduction of debt-to-income ratios and try to avoid being blamed. In some respects that's better for the Government than it itself introducing a policy on the housing market that is not popular.

The upshot is I still think that debt-to-income ratios may well at least be announced by about October - even if they are not ready for introduction till next year.

A proliferation

I think the ratios are in principle a good idea. But I am concerned that we appear to be seeing a proliferation of these macro-prudential policies. And it does rather start to cast the RBNZ into the role of the eccentric scientist playing with a chemistry set to get the right solution. As many young children have found out, playing with a chemistry set can have unintended consequences.

We've already got the LVR speed limit, then we added the Auckland investor restrictions, and a differential speed limit between Auckland and the rest of the country. Now, are we going to leave all that as it is and just add on the debt-to-income ratios as well? It all starts to look a bit ad hoc to me. And the problem with introducing a number of measures is that they all might have slightly different effects and impacts, which could act against each other. That unintended consequences thing.

I think there's validity in the argument, for example that the LVR speed limits have in their own way incentivised investors to get more involved in the house market because of the way in which they have disincentivised first home buyers. So, then you take action against the investor problem...that you've helped to worsen. And what problem does the investor action then create? Do you see what I mean?

So, I say go ahead with debt-to-income ratios, but what about a rethink of LVRs?

The RBNZ has fairly warmly congratulated itself on the success of LVRs. Personally I think the central bank has crucially played-down the very big role that the ill-starred interest rate hikes from the RBNZ in 2014 actually played in dampening the house market then. If the LVRs had been left to do the job on their own I don't think you would have seen quite such a dampening effect.


But one thing is clear, the banks, who were charging headlong into high LVR lending before 2013 have been pulled back. According to the RBNZ, across the banks now, high LVR lending accounts for only 13% of bank mortgage exposures versus 21% in 2013. What that means is that the banks are more insulated now against a precipitous house price fall than they were previously. And that's a good thing.

Does anybody remember though, that the LVRs were supposed to be temporary? The RBNZ doesn't mention that any more.

I hope that the whole LVR policy is thoroughly reviewed over the next few months - at the same time as the debt-to-income ratios policy is finalised.

If it's at all possible, I say let's see the lifting of that LVRs policy, in conjunction with application of the debt-to-income policy. And then let's think about making banks hold more capital against their mortgages.

We need this to be kept simple, otherwise the country risks getting immersed in macro-stew.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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What will happen to all the borrowers with lending already in very high multiples of debt to income? Will we just be allowed to carry on at our current multiples? No one mentions this but if existing borrowers are 9x multiples and new borrowing is assessed at 5x for example, no one will sell their property. The Auckland market may find itself with no listings!

Very, very good point ! Also what happens if you're above DTI ratios with existing loans and you want to renew an existing loan ? will you suddenly be forced to sell ???

If the RBNZ didn't allow existing debt to be rolled over the huge percentage of floating to 2 year borrowing would cause half of Auckland to default. They will surely allow it. But it will mean the majority of investors can't buy any more properties.

On the listings side all it will take is a change in sentiment.

You are of course assuming one thing. That this idea will be introduced. I think you have just pointed out another reason why it's unlikely. Some are always looking at selling however, but you highlight how this idea would shut down the bottom feeding of the pyramid which they know is required to keep it trucking along

I think they are firing a shot across the bow to get govt. to take some action.

It seems to have worked with some major announcements around rma reform.

I don't see loan to income restrictions happening. Auckland will choke itself and flat line or even fall during the next few years as more off the plan sales on newly zoned land soaks up demand without needing to actually build which takes time. Fast tracking consents may also help.

There is no crisis or extreme prices outside Auckland (bar Queenstown) and that will be left for a while to grow moderately to indirectly help the regions over next few years.

How to put the genie back in the bottle

Ironic. Up until the 1990's home finance lending was the preserve of Insurance Companies and Building Societies who simply used DTI's and LVR's of 70% as a lending criteria. They did it on their own without any direction from the Government. Self-regulated. If you wanted or needed more you had to get a solicitors second mortgage, or get vendor finance. Then the Banks acquired the insurance companies giving them control of the housing-finance industry, and we all know now where that has gone. LVR's of 100%. Liar loans. Low Doc loans. Instant mortgages. Prior to 1980 the banks had a mere 3% of the mortgage market. Now closer to 60%

This problem has been been self-created, and now it's the RBNZ's problem? Get real.

There will come a time when the real estate market corrects itself naturally, all the macro prudential tools will then turn the correction into a proper crash

A slightly unfair simile, DH. RB is less like the mad scientist in the lab (which signals a full control over ingredients, but absent a knowledge of what various combinations could cause.

It is more like a small-boat sailor, in a slightly leaky (persistent current account deficits) boat, in a very choppy sea (external environment) and with much larger ships (bow-waves and wake) speeding by, across, and towards. With a small bailer, a frayed sail, no motor, and patchy wind....

Consider the obvious solutions to the housing crisis and then ask how the RB can possibly assist:

  • Scrub MUL's, RUB's and indeed all spatial zoning. The RMA judges by Effects only so is sufficient control.
  • Sell only new houses to furriners: that means their recently washed cash at least expands the housing stock. Oz does this now.
  • Built lotsa houses (but see below for conditions upon this) - a deluge of supply will hold or reduce prices. This has been Christchurch's exact experience over the last 6 years.
  • Seed subdivision via Urban Development vehicles (e.g. Development Christchurch) - this will require legislative changes to accomplish NZ-wide. Having Public Works Act powers of compulsory acquisition, is essential to ensure the CG thus created is retained in the public sector, not leaked off to private individuals. Cf Singapore
  • Seed mass customised building techniques (like Concision http://concision.co.nz/) by letting social-housing contracts for 000's of units to such firms. This will secure such techniques' futures (they need volume to operate), reduce unit building costs and build a base for extension into the larger, more customised houses for other than the poor and hapless.
  • Ensure local TLA units are ruthlessly excluded from dabbling in the same pond by clipping their wings even further (changes to the LG Act). No use risking a repetition of the 2002 Act changes which have led LG astray for a decade.
  • Panelised or similar factory-produced builds must be multi-proof consented at source, for much the same reason.
  • Wind back all building regulation on sites. Factory-produced builds need simple site assembly, no time for the form-filling and massive overheads of Elfin Safety as currently imposed. They're all cost, close to zero incremental benefit. Elfin Safety needs to be directed to the real dangers, as revealed by ACC claim history, not (as currently exists) the latest brain-fart of a bureaucrat's feeble mind.
  • The building-materials duopoly has to be tackled by anti-trust-style action. Let a contract to the Oz ACCC and watch the feathers fly...
  • Local authority charges, fees, contributions and other imposts need to be put on a commercial basis: and watched over by an ACCC equivalent. At present, they make up their own rules and (as the hapless Mr Fan (sp?) has discovered in the case of the Auckland garage move, are punitive, vindictive and cluelessly rule-bound when crossed.

A short list, done by lunch-time, by an RB???? I think not.

Just stop filling the country up with migrants and all the problems will start to fix themselves as the houses get built and the infrastructure catches up. NZ doesn't owe these people a home. The infrastructure to service 1,000 homes is immense and shouldn't be the taxpayers problem.


Checkpoint..with John Campbell...All poll lies should see it. And Awkland councillors.

It is a shame that a wider perspective wasn't available on the JC story.....While he obtained the rental price of one property that was available and we all get the high number of inhabitants....I would want to know how many people are working or receiving state funded benefits etc in these areas.......If we don't know the total number of adults and income going into these types of households it is easy to get side-tracked.......

How will DTI suppress immigration numbers?
How will DTI stop foreign purchasers?
How will DTI stop International students, & them purchasing via pipeline money?
How will DTI stop investors with good levels of equity?
How will DTI stop purchasers who do not need to borrow the large proportion from NZ banks?


Alter Ego good post... Rather depressing to watch.

Investors profiting as the expense of society's most vulnerable. High house prices puts pressure on rents while wages haven't moved causing a human social disaster.

People working and having to live in cars & tents.

Time for some action.
Stamp Duty on the investors. Strict Loan to income ratio's on investors.

How the heck would fewer investors providing rental accommodation reduce rent ?

Not enough houses full stop. Open up more land is the answer and has been since 2006 when I started following the issue.

Depends what you call provide doesn't it? Bidding up house prices due to tax and policy settings that favour 'investors' doesn't seem to have 'provided' much - just higher prices and a change in ownership type.

Hows that going to work? You won't get stamp duty, thank god! Sit there like a child with your fingers in your ears all you like but even if some punitive taxes were added at the point of sale do you really think that's not going to get added onto the rent? Let be honest, these people will never own so why do you want to punish them with higher rents? LTV ratios on investors is easy to get around.

Exactly spot on rastus... no stamp duty etc on new builds. That way investors can "provide a service" ie new homes...

Stamp duty easy to get around ?

Not punish it is called encouraging new builds not "just higher prices and a change in ownership type"

Stamp duty is coming. it is not if it is when !!

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