Treasury criticises RBNZ's new high LVR limit on Auckland property investors; says it should have focused more on systemic risk than house prices; concerned about late notice

Treasury criticises RBNZ's new high LVR limit on Auckland property investors; says it should have focused more on systemic risk than house prices; concerned about late notice

By Bernard Hickey

Treasury has criticised the Reserve Bank's plans to target Auckland property investors with restrictions on high LVR lending, saying the bank should have focused more on systemic risk than house prices, and that the policy was rushed.

Treasury officials advised Finance Minister Bill English on May 25 in this Aide Memoire that the Reserve Bank had not made a compelling case for the changes.

"We accept that house price changes can have macroeconomic implications, but the RBNZ’s mandate is to promote financial stability. Therefore, the policy should be reframed to focus more clearly on reducing systemic risk, rather than on prices in a particular market," the officials wrote.

They were also critical of the bank's focus on property investors.

"The evidence presented is somewhat mixed on the extent that high-LVR investors underpin systemic fragility, as they are a relatively small part of the market and many may be able to alter their portfolio," they said.

"Similarly, we will be asking the RBNZ to provide further information on the extent to which the increase in investor activity may have been encouraged by the original LVR policy."

Treasury also warned about the Reserve Bank's plans to loosen the original LVR restrictions outside of Auckland.

"Although we appreciate that the policy was designed to be temporary, and that the RBNZ prefer light touch regulation, there are a number of potential downsides," it said.

"In this case, the policy rule is not clear, and the RBNZ policy settings are reactive to recent data. This may lead to an active management of policy settings, which may increase market uncertainty and reduce RBNZ credibility."

The officials said Treasury's modelling suggested that the costs of taking off the limits off early may be greater than leaving them in place for longer, adding the Reserve Bank had not looked at some of the possible unintended consequences, including "increased risk of disintermediation or higher non-bank lending; the possibility of shifting demand towards cashed-up buyers; or risks that investors leverage up property outside of Auckland."

'Late notice'

Treasury was also critical of the haste with which the Reserve Bank was proceeding.

"The late notice and lack of consultation complicates the ability of government agencies to coordinate, which could lead to government policy that conflicts or pays inadequate attention to government’s wider economic objectives," it said.

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

16 Comments

Rbnz is independent and the nz expert on financial stability. Who cares what govt thinks they have their own motives and agendas

Not to mention the neo-con halfwits at Treasury who under-predicted the 2008/9 recession, or the fact that the IRD does better predictions than them, oh wait, lets.

Totally agree. Treasury should pull its head. Their advice is incompetent. We are facing the mother of asset bubbles and an incompetent government hell bent of running migration rates way above aucklands infrastructure build rate. The RBNZ action is exactly what is needed.

Auckland house prices spiralling up 100% or more in 5 years in many cases (especially inner suburban character houses with larger freehold sections), isn't going to cause a risk to the economy??

Only on Planet Treasury...

(It does not compare to the 2003 boom in the regions where house prices came off a very low base).

wasn't the RBNZ forced to act in the absence of a Govt response, I believe the words "there is no housing crisis" have been uttered in public

The RBNZ's policies actually infringe upon most constitutional rights....

NOTE below (2) states "by law" A Policy, rule or regulation of any Government Dept/Agency is not a LAW!!!

Article 29.

(1) Everyone has duties to the community in which alone the free and full development of his personality is possible.
(2) In the exercise of his rights and freedoms, everyone shall be subject only to such limitations as are determined by law solely for the purpose of securing due recognition and respect for the rights and freedoms of others and of meeting the just requirements of morality, public order and the general welfare in a democratic society.
(3) These rights and freedoms may in no case be exercised contrary to the purposes and principles of the United Nations.

^ Top
Article 30.

Nothing in this Declaration may be interpreted as implying for any State, group or person any right to engage in any activity or to perform any act aimed at the destruction of any of the rights and freedoms set forth herein.

The RBNZ's LVR policy would also be implicated in this next article.....the right to own property is not a free right under LVR's as they are restrictive to some people depending on which group a person is deemed to come under within the parameters of the RBNZ policies! It is deprivation via percentages by a Government Agency.
Article 17.

(1) Everyone has the right to own property alone as well as in association with others.
(2) No one shall be arbitrarily deprived of his property.

we don't have a constitution, since we're technically a self-governing State of Australia

You're wrong.

Thats like saying asking 1mill for a property is " restrictive to some people depending on which group a person is deemed to come under within the parameters of the" the vendor...

I also have the right to a stable and safe financial system that doesn't unduly expose me via moral hazard to financial loss from the incompetent and frankly greedy ie paying more tax when the Govn is forced to bailout the banks.

I say good on Treasury for calling Mr. Wheeler out. As the New Zealand Herald reported, Treasury said Wheeler has exceeded his remit.

Not only is Wheeler a scare-monger to every young person in New Zealand, but he is rorting democracy by making policy with no consequences on him and no opportunity for voters to say 'no'.

Wheeler is a government employee setting policy. Don't we elect governments to do that?

Like all RB Guv'nors, Wheeler has a miserable view on life and takes a gloomy view of everything that happens in the economy. He should go fishing for six months.

Whether Wheeler was right or wrong with his LVR policy one thing is clear.
It hasn't worked and it has only made matters worse.
House prices are rising faster than ever
Rents are following suit .
First home buyers are hit the hardest.
Investors are creaming it.
The Auckland contagion is being forced into the provinces.
As Olly Newland rightly said: Wheeler has forgotten the golden rule of unintended consequences.

I dont agree here, the FHB is the most fragile financially and the one that the RB should be most concerned about from a systematic risk stand point. The LVR has in effect limited these, ergo for me it looks successful.

Rents dont look like they are going very far actually.

Investors are risking their own capital so I have no issue if they "earn" a profit off their own money. Of course they have to cash in and property like shares can become il-liquid fast.

"into the provinces" hardly....

"olly" well as the saying goes it isnt over til the fat lady sings, see para 3 above. One of the clear consequences of a too high LVR is the huge negative impact on real businesses, their profits and hence jobs. Your game of musical chairs only keeps going as long as there is a real economy underneath supporting it.

It was listed as a way to stabilise the banks (which didn't have a problem in the first place, and _should_ be exposed to their own moral hazard. If they're"too big" then that's The Problem, and needs to be remedied at the policy level, not propped up by box-tickers.

It was also written up as a control for house prices in Auckland, which it clearly hasn't been effective.
Will this be the trigger for those box-ticking experts to start questioning the assumptions in the systems they've been taught to use??

After all the exact results *were* predicted by people here on interest.co.nz so they can't claim its unseen or impossible to predict.

Or is it corruption?

BigD. Yes every decision has all types of consequences. Also, doing nothing (making no decision) has consequences too and that is what we have had for a number of years of rocketing prices. Continuing to do nothing (Govt) is worse than trying to change for the better.

Nope. The reserve banks remit is not to bring down house prices.
It is to ensure financial stability when (not if) those prices collapse.
LVR is protecting the average kiwi from the stupid highly leveraged kiwi who expects capital appreciation with no correction. The average kiwi should thanks the reserve bank for doing something that the gutless wonder of a government was too pathetic to do.

then there remit needs changing. Gestapo officers murdered people outright. They don't get to stand behind "I was just following orders/doing my job"

Your access to our unique content is free - always has been. But ad revenues are diving so we need your direct support.

Become a supporter

Thanks, I'm already a supporter.