“Sad-faced young couples” make for good copy and good economics

Liam Dann would like to hate the Reserve Bank for their apparently callous treatment of the hopes and aspirations of first time house buyers, but finds the reality to be very reasonable

You might think, for all the fuss about them, that the Reserve Bank’s new loan restrictions are being introduced to punish hipster house hunters for ironic facial hair and forcing middle-aged people to wear uncomfortably skinny jeans.

But it turns out the Reserve Bank has other reasons for limiting the amount of high loan to value ratio (LVR) lending that the banks can do.

If you’ve heard him speak, you’ll know that Reserve Bank Governor Graeme Wheeler makes an extremely good case for the new policy.

Although sad-faced young couples, who have missed out on their dream home because they need a bigger deposit, make a better-looking one and have been getting all the attention lately.

Personally, I was sceptical about the LVR policy precisely because it does put the squeeze on first-home buyers and makes it harder for them to get into the property market in the short term.

But I’ve been convinced that the reasons for introducing the policy are valid.

The real question is why young people think it is their birthright to jump into a pallacial home 95% paid for by the bank from Day One?  

But, if you can’t afford a 20 per cent deposit on a house, then perhaps you can’t really afford the house. And if that’s not fair then it is not fair because of the fact that house prices are too high.

Which is a second good reason for LVRs. If they dampen demand they could potentially lower house prices. In Auckland and Christchurch they almost certainly won’t, but they could help slow growth and that could buy some time for house hunters to keep saving for a deposit.

A third upside to LVRs is that if they work they will reduce the need for the Reserve Bank to raise interest rates as fast as it might have. That’s good for all mortgage holders, especially new home owners with high debt levels.

Finally there is the official reason the Reserve Bank is introducing these restrictions. The bank has a statutory duty to ensure the stability of the New Zealand financial system for the good of the country. That means it has some control over how banks are allowed to behave.

The Reserve Bank is simply not comfortable with the banks holding a high level of low equity loans in the wake of the worst financial crisis the world has seen since the Great Depression. Debt was to blame for the crisis in 2008.

So to those who say the bank is being overly cautious, one can only ask: “Dude, what planet have you been on for the past five years?”

Source:  NZ Herald

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