A Reserve Bank announcement on some sort of loan-to-value constraint on housing sector lending "may be only days away", BNZ head of research Stephen Toplis says.
In a commentary looking at the speech on Thursday by RBNZ Governor Graeme Wheeler, Toplis said that the central bank was "in a complete bind".
"In short it is faced with choosing between allowing the housing market to overheat spectacularly, threatening widespread inflation and raising the risks to the banking sector of a future correction, or encouraging the [New Zealand dollar] to head for the stars in turn undermining the rebalance that New Zealand so desperately needs and severely compromising our future potential growth rate."
Toplis said the RBNZ had, in consultation with Government, rushed through the required process to get its so-called macro-prudential policy tools up and running at "a breakneck pace".
The four tools include the potential for the Reserve Bank to introduce restrictions on the share of high loan-to-value ratio (LVR) residential mortgages being made by banks. See all our stories on macro-prudential tools here.
Toplis said the speed at which the RBNZ has moved to get the tools up and running was a clear signal that it was keen to utilise them as soon as possible.
The latest speech by Wheeler had reinforced that desire in preparing markets, and the populace, for a near term announcement on prudential policy measures.
"...It looks like the Bank is ready and willing to throw the kitchen sink at the perceived problem.
"We have long argued that it looked likely that the RBNZ would impose some form of loan-to-value constraint on housing lending before year’s end. Today’s speech indicates that an announcement on this may be only days away. But, in addition, Governor Wheeler specifically noted that 'capital and liquidity overlays can help build up buffers in the banking system' intimating that something may well be afoot on this front as well."
Toplis said he understood entirely "where the RBNZ is coming from in this regard".
"In particular, we are very wary that speculators may be re-entering the market, particularly in Auckland and that this behaviour needs to be curbed. Be that as it may, what these prudential policy measures will do, in the very words of the central bank, is 'reduce the actual supply of mortgage lending'.
"The question is: if the limited supply of new houses is the primary source of house price inflation, as we suspect, what are the longer term implications of potentially further reducing that supply via credit rationing?
"There is no doubt lending restrictions will, at least in the first instance, assist the primary objective of bank balance sheet stabilisation, it’s the externalities that concern us. This is not to suggest that we know what will happen but rather to highlight that such policy measures should be considered experimental, with the New Zealand populace the lab rats in the experiment," Toplis said.
He said that as an aside, the BNZ was concerned with recent anecdotal evidence that people are using their Kiwisaver funds to enter the housing market and, in turn, taking advantage of a significant government-funded top up.
"We would recommend some urgent analysis on this development so that we might find out its extent, its impact on the housing market, its impact on household savings and the magnitude of the Government’s contribution."
Toplis said he thought Wheeler's speech "was a great effort at trying to pull together all the threads of a difficult situation".
It reflected, Toplis said, the complexity of the environment and the many dilemmas that the Reserve Bank faces.
"We understand the approach that the RBNZ is taking but we are sceptical that the housing market will settle down until such time that the RBNZ is some way through an active tightening in monetary policy. Accordingly, we remain of the view that process will begin in the first quarter of the New Year."