The Reserve Bank is dismissing "monetary policy orthodoxy" too quickly and taking "an educated guess" that its speed limits on high LVR lending will work, according to BNZ's head of research Stephen Toplis.
The comments from Toplis in his weekly "Economy Watch" follow on from criticism he levelled at the central bank last week.
Then he termed the, at that stage, proposed RBNZ limits on high loan to value lending as the biggest central bank experiment seen here in decades.
This week, of course, RBNZ Governor Graeme Wheeler announced that from October 1 banks would be restricted to making no more than 10% of their new loans to customers borrowing in excess of 80% of the value of the property they are acquiring. See here for articles on LVRs.
Toplis said the RBNZ had "moved into the realms of experimentation" with its "macro-prudential prescription".
"The Bank accepts that it is in broadly uncharted territory," he said.
New for NZ
He quoted the RBNZ statement that:"The macro-prudential policy approach is new for New Zealand, and experience in the use of these policy instruments and the data required to support them are currently limited. This makes the quantification of costs and benefits difficult".
"Again," Toplis said, "the clear message here is that the Bank is taking an educated guess that what it is proposing will work".
"...What continues to worry us is the Reserve Bank’s reluctance to utilise orthodox monetary policy to cure the 'problems' that the economy faces. If the Bank really does believe that house price inflation is getting out of control the accepted wisdom is that rising interest rates will be most effective at limiting it."
Toplis made the following points:
- We are fully supportive of the central bank doing what it can to ensure the integrity of the New Zealand banking system is protected;
- We are comfortable that the recently announced LVR restrictions will help, in this regard;
- We do believe that excessive house price inflation is unwelcome;
- We do think that house prices are “overvalued” relative to standard metrics;
- And we do think that the LVR restrictions will have a negative impact on house price inflation;
- Moreover, we do accept that an overvalued housing market will tend to go hand-in-hand with an “overvalued” exchange rate so reducing the pressure on housing inflation will, all other things being equal, result in a lower currency.
However:
- We still believe that monetary policy orthodoxy is being dismissed too quickly;
- The central bank is tending to use spurious analysis to support its stance;
- There are many inconsistencies in the central bank’s diatribe.
Toplis said he understood the reluctance of the RBNZ to raise interest rates given the strength of the New Zealand dollar and current low inflation.
"...But this is a tried and true way of attacking the problem.
"Is the housing market overheating because the banks are supplying too much credit or is it because the cost of money is simply too low?
If it is the latter then 85% of home borrowers and nearly every other borrower in the economy will not be adversely affected by the LVR announcement. In fact, they will face lower interest rates than would otherwise have been the case."
Toplis said he remained "bothered" that the Reserve Bank continued to promulgate the view that New Zealand was vulnerable to a housing correction based on what happened in such places as the United States, the UK, Ireland and Spain.
"One would have to first correct for such things as the prevalence of low-doc loans to predominantly low-income people, the impact of adjustable rate mortgages, the fact that LVR’s in some cases were well above 100%, the excessive growth of finance sectors, different refinancing obligations and, most importantly, the role of excess supply of housing before making such comparison."
Toplis said you would be hard pressed to conclude that New Zealand house prices were currently under threat from excess supply.
He said BNZ economists restated their premise that they are not opposed to LVR restriction per se.
"...But we are worried lest an experimental macro prudential tool becomes seen as a replacement for orthodox monetary policy."
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