There is "nothing inequitable" about regional housing markets suffering because of the Reserve Bank's 'speed limits' on high loan-to-value lending, according to BNZ chief economist Tony Alexander.
In his latest Weekly Overview Alexander said arguments for regional implementation of the LVR rules "do not hold water".
"In fact, given that the only shock likely to cause a huge decline in NZ house prices is something like foot and mouth disease, the chances are that the regions would suffer far greater house price declines and negative equity positions than Auckland in particular."
Both before and since the LVRs were introduced by the RBNZ in October there has been debate around the country about whether they should have been regionally targeted - with emphasis given to markets such as Auckland that were perceived to be overheating.
The RBNZ ruled out specific regional targeting of LVRs, saying it "would be administratively complex, and would require difficult decisions to be made defining ‘problem’ areas".
Professor Mark Skidmore from Michigan State University's department of economics, in a paper prepared for the NZ Treasury, has recently refuelled the debate about more specific targeting of LVR restrictions. "In particular, given that Auckland is the only region experiencing rapidly rising housing prices driven by population growth, it may be prudent to consider a targeted response as opposed to a nationwide response such as the loan to value speed limit (LVR) policy recently adopted by the Reserve Bank of New Zealand," Skidmore wrote.
But BNZ's Alexander said it was "time that a certain very un-PC truth" was told about the impact of the LVR rules.
"They were not driven by specific concern about the Auckland housing market and there is nothing inequitable about regional housing markets suffering because of the rules," he said.
Alexander stressed that the RBNZ had aimed to do is limit the exposure of bank balance sheets and therefore the overall economy in the event of a shock which caused house prices to fall precipitously and cause borrowers to face negative equity.
"Think of that shock as being a foot and mouth outbreak.
"In the event of such a thing house prices will fall everywhere as the economy shrinks by some huge amount. There is little reason for believing that Auckland house prices will fall more than prices elsewhere."
In fact, Alexander said that examination of house price changes between late-2007 and the nationwide average bottom early in 2009 the biggest declines were recorded in Southland, 12%, Central Otago 10%, Nelson 8%, Canterbury 7%, Otago 6%, Waikato and Northland 5%, and then Auckland 4%.
"If lots of people have borrowed with 90% debt in Napier then lots will have negative equity should prices fall 20%. If lots have borrowed with 90% debt in Auckland and prices fall 20% then again lots of people will be in negative equity positions."
The fact that "so many people" were "bemoaning" the large impact the LVR rules have had in the regions "tells us that there are lots of people, proportionately speaking, who buy houses with low deposits outside of Auckland and Christchurch".
"There is no moral superiority in the argument that regionally-based young buyers are either disproportionately affected by the rules or affected when they should not be. They are just as much (in proportion to population probably) a part of the negative equity bank capital base risk that the Reserve Bank is trying to mitigate as the young buyers in our two largest cities," Alexander said.
Arguments against the LVR rules needed to be couched in terms other than "alleged but unproven disproportionate regional impacts", he said.
"A better angle is, as we have been highlighting, the disproportionate impact on first home buyers compared with foreigners and investors all around the country.
"In that regard again the regions fare better than Auckland given the lesser influence of now newly-favoured foreign buyers in those non-Auckland markets which traditionally attract less interest from people offshore."
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