The Reserve Bank is consulting on the Governor’s proposal to ban loans with an LVR in excess of 70 per cent for residential investment property businesses in Auckland. I have written quite a bit on this proposal since it was first revealed when the FSR was published in mid-May, and was hesitant about spending more time on the issue (my kids would have preferred another board game or two). But I did decide to write something.
Submission to RBNZ investor finance restrictions July 2015
Submissions close on Monday.
Here are a few extracts from the introduction and conclusion of my (not overly long) submission.
As I have noted in various pieces of public commentary on this proposal, in such matters the Governor effectively acts as prosecutor, judge and jury in his own case. As such it is difficult to have any confidence in the consultative process – it is simply implausible that the single person actively and publicly proposing such restrictions can take a properly dispassionate and impartial approach to assessing submissions on the proposal. The proposed turnaround time, from the closing date for submissions to the release of the final policy position (“early August”), casts further doubt on the seriousness, and open-mindedness, with which the Bank (the Governor, as sole decision-maker) is approaching the consultative process on the substantive proposal (as distinct perhaps from the fine operational details). Confidence in the process is further undermined by the fact that no cost-benefit analysis has been provided for the proposal. We all know that cost-benefit analysis, in the right hands, can be generated to support any proposal, no matter how egregious, but proper cost-benefit analysis at least force the preparers to write down their assumptions, which enables them to be scrutinised, debated, and challenged.
My concerns about the substance of the proposal fall under five headings:
- The failure to demonstrate that the soundness of the financial system is jeopardised (this includes the failure to substantively engage with the results of the Bank’s stress tests).
- The failure of the consultative document to deal remotely adequately, with the Bank’s statutory obligation to use its powers to promote the efficiency of the financial system.
- The failure to demonstrate that the statutory goals the Bank is required to use its power to pursue can only, or are best, pursued with such a direct restriction.
- The lack of any sustained analysis (here or elsewhere in published Bank material) on the similarities and differences between New Zealand’s situation and the situations of those advanced countries that have experienced financial crises primarily related to their domestic housing markets.
- The failure to engage with the uncertainty that the Bank (and all of us) inevitably face in making judgements around the housing market and associated financial risks, and the costs and consequences of being wrong.
The absence of any substantive discussion of the likely distributional consequences of such measures is also disconcerting. Distributional consequences are not something the Reserve Bank has ever been good at analysing. In many respects they were unimportant when the Bank’s prudential powers were being exercised largely through indirect instruments (in particular, capital requirements) but they are much more important when the Bank is considering deploying direct controls. In particular, the combination of tight investor finance restrictions in Auckland and the continuing overall residential mortgage “speed limit” is likely to skew house purchases in Auckland to cashed-up buyers. In effect, to the extent that the restrictions “work” they will provide cheap entry levels. New Zealand first home buyers and prospective small business owners will be disadvantaged, in favour of (for example) non-resident foreign owners. At very least, it should be incumbent on the Bank to spell out the likely nature of these distributional effects.
The restrictions proposed by the Reserve Bank do not pass the test of good policy. The problem definition is inadequate, the supporting analysis is weak, and the alignment between the measures proposed and the statutory provisions that govern the use of the Bank’s regulatory powers is poor.
Reasonable people might differ on when policy tools should be deployed, but we should be able to disagree on the basis of much more extensive, robust, and well-documented background material than has been presented in this consultative document. At present, the evidence that we do have suggests that the New Zealand banking system is strong and highly resilient, with no sign that there has been any serious or disconcerting deterioration in lending standards. The Reserve Bank appears to be mistaking high house prices that result from real structural factors (land use restrictions and immigration policy), with those that results from a credit-led process. The latter might argue for much tougher prudential controls, though probably still less distortionary indirect ones. But there is simply no evidence at present of such a credit-led process. Yes, house purchases need to be financed, but that appears to be a largely passive facilitative process, which poses no materially enlarged threat to the soundness of the financial system.