Kiwibank economists are suggesting the Reserve Bank should move to force banks to more highly price riskier home loans such as interest-only and investor loans.
The suggestion, aimed at cooling the scorching hot housing market, comes in the Kiwibank economists' weekly First View publication.
Until fairly recently the RBNZ had been widely expected to take the Official Cash Rate (currently at 0.25%), below zero, but a stream of stronger than expected economic data has changed that view. Much stronger than expected inflation figures released last Friday reaffirmed the new view that there will be no more OCR cuts.
And then there has been the housing market...
"The rampant run in the housing market has surely taken a negative cash rate off the table," the Kiwibank economists say.
"We now expect the OCR to be left unchanged, well into 2022. Market traders had placed bets on further rate cuts following the RBNZ's rhetoric last year. Now, market pricing of further rate cuts has effectively been removed and wholesale rates have been shunted higher. The Kiwi dollar has surged, with New Zealand's outperformance on the global stage."
The economists say that thoughts of further RBNZ easing "have turned to thoughts of RBNZ tightening via macro-prudential policy".
Already the RBNZ has signalled reintroduction of bank limits on high loan to value ratio (LVR) home loans from the beginning of March. The limits were removed on May 1, 2020 in the face of the Covid crisis.
The Kiwibank economists now say the next best step the RBNZ could take is a "reassessment, and bank repricing, of the risk associated with home loans".
Banks do much of their business in home lending because the 'risk weighting' rules allow them to hold less of their own capital against home loans than against for example business loans.
The Kiwibank economists suggest the RBNZ could adjust the banks' risk weighting on home loans "to better reflect the higher risk associated with interest-only and investor loans".
"Applying a higher risk-weighting on investor mortgages, forces banks to hold more capital against those loans, and ultimately price them differently.
"Someone walking into a bank with a 30% deposit, to upgrade their home, should receive a lower interest rate than a leveraged investor buying their 5th investment property on interest only," they say.
But they do acknowledge that any tweaks to mortgage rates won't fix the housing problem, "not even close".
"Attacking demand is not the answer.
"Fuelling supply is the answer.
"And fuelling supply is more a fiscal responsibility.
"The Government must step up, in support of the councils, to unlock land, build the infrastructure, and provide long-term plans to tackle our chronic housing shortage. A multi-pronged approach that provides certainty is needed to channel resources into housing development. We've heard the excuses. We know the solutions.
"We need to put our foot on the shove al-ready."