Australia cautioned against RBNZ lending rules

RICHARD MEADOWS
Last updated 16:53 06/08/2014

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Australia is considering copying the Reserve Bank's controversial home loan restrictions, but experts say authorities across the Tasman are right to be sceptical.

Loan-to-value ratio (LVR) limits have been in force here since last October and are aimed at taking some heat out of the housing market and preventing the risk of a collapse.

Australia has a similar housing boom, with Sydney having 15 per cent year-on-year growth.

The country's outgoing Treasury secretary, Martin Parkinson, suggested in a recent speech that "macroprudential" policies should be considered.

He said monetary policy was a blunt instrument, while prudential tools "can be employed where necessary and appropriate".

The same rhetoric was used to justify the creation of the Reserve Bank of New Zealand's (RBNZ's) expanded toolkit.

Reserve Bank of Australia (RBA) meeting minutes show board members discussed the use of the tools in other countries and their possible application in Australia.

Before the LVR rules were introduced, the RBNZ was concerned that riskier loans, where borrowers had less than 20 per cent equity, made up a quarter of new lending.

At the same time in Australia, the equivalent figure for the big four banks was 35 per cent.

The Australian Prudential Regulation Authority said it would "take supervisory action" if a lender went overboard on the riskier loans, but neither it nor the RBA has taken further steps.

Massey University banking expert David Tripe recently gave a speech on the issue to the Melbourne Money and Finance Conference.

He said the two countries' housing markets were in similar positions, but regulators had reacted differently.

"I would be reluctant to argue that things were so bad in Australia that intervention was necessary," he told BusinessDay.

"If that's the situation, it certainly isn't clear there should be intervention in New Zealand."

Tripe said that as soon as the LVR policy was removed there was likely to be a surge in the Auckland housing market again.

"It's not at all clear to me that taking the policy off would result in anything being fixed," he said.

He said it would be better for the RBNZ to beef up its requirements for banks to hold more capital against the riskier loans.

"If your concern is about potential bank insolvency, make the bank hold more capital, rather than trying to micro-manage lending decisions," Tripe said.

HSBC Australia and New Zealand chief economist Paul Bloxham said the RBA was relying on its monetary policy and other existing settings.

"That's a reasonably sensible position to hold," he said.

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"It feels a bit too much like over-engineering on the central bank's part to introduce more tools such as the loan-to-value restrictions."

Bloxham said Australia's property market was up 10 per cent year on year but still looked to be part of a normal cycle.

"I don't think Australia has a bubble at this stage. Sydney is the area to watch most carefully."

He said the RBNZ's experiment had worked in the sense that it had sharply reduced high-LVR lending.

"But did they actually slow the overall housing activity down or was it the lift in interest rates? That's a much harder question to answer," he said.

- Stuff

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