Submissions close today on the Reserve Bank’s consultation on its proposal to add a debt to income limit tool to the approved list of possible direct controls on bank housing lending.
Despite the Prime Minister’s comments the other day, I don’t regard this as a “dead duck” at all. The Reserve Bank won’t be coming back to the Minister of Finance with its recommendation, in light of the consultation, until after the election, and who knows what the political or housing market climate will be like by then. Graeme Wheeler will be gone by then, and so the Reserve Bank’s decision will be in the hands of the (illegally appointed) acting Governor, Grant Spencer, and new Head of Financial Stability (and presumed Governor-aspirant) Geoff Bascand. Perhaps they will have less appetite for controls than Wheeler has had – both come from backgrounds that were not particularly keen on direct interventions – but for now we have to assume that the proposal will continue to move ahead.
I ummed and aahed about whether to make a submission. In one sense, it is a pure waste of time, since the Bank is unlikely to grapple very seriously with any points I make. But, on other hand, it is good to have alternative perspectives, and questions, on the issue out there, and just possibly it might provide some angles for people with a bit more influence than I have.
So I did write a fairly brief submission. My overview and summary is here
I am firmly against adding any sort of serviceability restriction (henceforward “DTI”) to the list of possible controls. The Reserve Bank has failed to mount a convincing case, and has not demonstrated that it (or anyone) has the level of knowledge required for such restrictions to operate in a way likely to make New Zealanders as a whole better off. Such restrictions would appear to go well beyond the Reserve Bank’s statutory mandate (contributing little or nothing to soundness and eroding the efficiency of the financial system), and a better cost-benefit analysis would in any case suggest that such controls would probably be welfare-detracting. Other instruments (such as capital requirements and associated risk weights) that do not impinge directly on the borrowing and lending options open to individuals and firms remain a superior way to manage any future risks to the soundness of the financial system. Serious microeconomic reform remains the best route to fix the serious housing affordability/land price problems.
As a reminder, the Reserve Bank has no statutory mandate to target house prices or the level (or growth rates) of credit in the New Zealand economy. It also has no “house purchaser or borrower protection” mandate. Restrictions of the sort proposed in the consultative document would represent serious regulatory over-reach.
The fact that a handful of advanced economies have deployed somewhat similar tools is little comfort or basis for support for the Reserve Bank’s own proposals. Bad policy elsewhere isn’t a good reason to adopt bad policy here. But more specifically, the interests of regulators themselves and of citizens are not necessarily, or naturally, well-aligned, a point that Reserve Bank material rarely if ever addresses. For example, the Reserve Bank makes much of the British and Irish DTI limits (which do not apply to investment properties, where the consultative document says the Reserve Bank would want to focus), but never addresses the institutional incentives facing regulators in those countries following the financial crises each experienced in 2008/09 (the typical regulator incentive in the wake of a crisis to overdo caution – and “to be seen to be doing something”, in the regulator’s own bureau-protection interests). On the flip side, neither in the current consultative document nor in past Reserve Bank material has the Bank seriously engaged with the experience of housing loan portfolios in floating exchange rate countries during the 2008/09 crisis. In countries like ours – including Australia, Canada, the UK, Norway, Sweden, as well as New Zealand – residential loan books emerged largely unscathed, despite big credit and housing booms in the prior years, and the subsequent nasty recession and, in most of these countries, a sustained period of surprisingly low income growth.
There has also been no evidence presented that banks have been systematically poor at making and managing portfolios of loans secured by residential mortgage, let alone that citizens should have any confidence in the ability of (and incentives on) regulators to do the job better. Anyone can suppress overall credit creation with tough enough controls, but to what end, at what cost, to whom? Controls of the sort now proposed, and the sorts of LVR restrictions already extensively used, seem to represent ill-targeted measures, based on an inadequate model of house and land prices. They temporarily paper over symptoms – house prices driven high by the failures of regulation elsewhere require high levels of credit – rather than address the structural causes of the housing market problems. And because they seem to be premised on a model that wrongly treats credit as a leading factor in the housing market problems, they also do little to address any (limited) financial stability risks. And in the process, they systematically favour some groups in society over others – the sorts of distributional choices that, if made at all, should be made only by elected politicians, not by an unelected official.
A reasonable starting proposition would be that in the 25 years prior to the imposition of LVR restrictions the New Zealand housing finance market had been efficient and well-functioning. Lenders lost little money, more borrowers could get better access to credit than in the earlier regulated decades, borrowers had no need to concern themselves with the changing details of Reserve Bank regulatory restrictions, there were no rewards to special interest group lobbying and rent-seeking, and competitive neutrality among different classes of lending institutions prevailed. Perhaps the Reserve Bank would disagree with that characterisation of the market, but if so then, in proposing still further extensions of its regulatory intervention powers, surely the onus should be on you to make your case, not simply to ignore the past, apparently successful, experience?
Anyone interested can read the whole document here
The DTI proposal is a tool to address, inefficiently, a problem that isn’t there (threats to the soundness of the financial system), while appearing to try to do something about an actual serious problem (house and urban land prices), of successive governments’ making, about which the DTI tool can do little or nothing useful. It won’t help, and if anything it distracts attention from the real issues, and from those really responsible, for the disaster that is the New Zealand housing “market”.