In this week’s NBR, I wonder whether the RBNZ’s done an adequate job of proving the financial stability case for the latest round of LVR regulations. The last set of stress tests showed that a 40% fall in Auckland prices combined with a recession generating 12% unemployment rates wouldn’t cause systemic issues, and the latest financial stability report provides no particular evidence that would overturn that view.
The best case we can make for the Reserve Bank’s latest round of loan-to-value home mortgage regulations (LVRs) is not particularly compelling.
Or, at least, it requires stretching our understanding of the bank’s prudential regulation mandate a bit farther than I’d like. This is dangerous because maintaining an independent central bank requires that the Reserve Bank act within the narrow confines of its mandate.
Unfortunately, the policy move itself has substantial risks. We have yet to see any assessment of the costs that designating a new asset class might impose on the banks that will have to comply with the regulation.
There will be tricky boundary cases: if a buyer secures a loan against his existing property and against a new purchase, with intention of selling the former after the move, would that count as an investor or owner-occupied purchase for application of the LVR?
But the more important risk is to Reserve Bank credibility and independence.
And here’s the results of the stress tests reported in the November 2014 RBNZ Financial Stability Report.