Last week, Treasury secretary Martin Parkinson joined the chorus calling the imposition of restrictions of bank lending to borrowers who have small deposits – so called high LVR (loan-to-valuation ratio) loans.
Known as macro-prudential regulation, the Reserve Bank of New Zealand (RBNZ) took the path late last year, putting limits on the amount of loans that NZ banks can lend to borrowers with less than a 20% deposit.
But the AFR reports this morning that according to associate professor David Tripe, Massey University’s director of the centre for financial services and markets, there is little evidence such rules work effectively.
“It is not clear that the problems the Reserve Bank of New Zealand perceived as warranting intervention will have changed to any significant extent,” Tripe told a conference earlier this week.
Key to Tripe’s argument is the distortions that such an approach takes within the market. New Zealand has seen first home-owner participation in the market fall away sharply.
“Every time you intervene you create some market distortions; the question is whether the distortions are worse than the problem you are trying to solve,” Tripe said.
Interestingly, in relation to the debate in Australia about banks needing to increase capital held against mortgages, Tripe said he believes it is the increase in capital needed to be held against high LVR loans that is the effective macro-prudential tool.
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