Tightening LVR restrictions

The Reserve Bank’s faux “consultation” on tightening LVR controls closes today. If you felt so inclined the consultation document is here, but it isn’t clear why you’d bother except for the record. Poor performance by powerful government agencies shouldn’t go unremarked.

I have put in a a short submission, simply to document some of the many problems with the consultation.

submission to RB on tightening LVR restrictions Sept 2021

Much of the text simply elaborates points I noted in a post last week. But here are a few extracts

More substantively, there is no discussion at all in the consultation document of the Reserve Bank’s capital requirements or the capital positions of the banks you are putting more controls on. As you will be well aware, the risk-adjusted capital ratios of New Zealand banks are high by international standards, and will be increased further – as a regulatory requirement – over the next few years.   Capital is, and always should be, the key buffer against loans going bad, and we know that the New Zealand framework imposes relatively (by international standards) high capital requirements in respect of housing loans, including high LVR ones.   It is simply unserious – or a desire to operate ultra vires – not to engage with the capital position of the banking system.  That is especially so as your consultation document acknowledges that tighter LVR controls will impair the efficiency of the financial system.  Given that acknowledged cost, there has to be a clear gain to financial system soundness (the other limb of your statutory goals/purposes) from any new regulatory impost, but your document makes no effort to quantify such a gain (reduced probability of failure), or to demonstrate that tighter LVR controls are the least-cost way to generate such a reduction.   There is not, I think, even any attempt to engage with the “1 in 200 years” failure framework that the Bank dreamed up a few years ago to support the capital proposals it was then consulting on.


The Bank’s consultative document also attempts to make quite a bit of an argument that somehow LVR restrictions now can dampen the size of future “boom-and-bust cycles” in the economy, even going so far as to claim these incremental restrictions will improve the medium-term performance of the economy. But none of this argument engages with the (very healthy) capital position of the banking system and at times it seems internally contradictory.  Thus, in paragraph 47 the Bank worries about dampening effects on consumption and economic activity from “increased serviceability stress” as a result of some future increase in interest rates, but never seems to recognise that the reason the monetary policy arm of the Bank would be raising interest rates is to dampen demand and inflationary pressures.  If anything, the Bank’s argument would seem to suggest that more high-LVR lending would, if anything, and in those circumstances increase the potency of monetary policy, and reduce the extent of any required OCR increases.    More generally, the Bank continues to place a considerable reliance on claims about a significant housing wealth effect on consumption that appear inconsistent with New Zealand macroeconomic data over many decades, and which appear to over-emphasise existing homeowners while largely ignoring the loss of wealth/purchasing power for those who do not (yet) own a house.


In conclusion, the Bank has simply not made any sort of compelling case for further tightening of LVR restrictions. At very least, such a case would have to involved a careful and documented cost-benefit analysis, that included engagement with the bank capital regulatory regime.  There is no pressing financial stability risk, and so this proposal – in practice, these new rules – has the feel of action taken for the sake of action, perhaps to provide some cover for a government that fails to address the house price issue at source, or to fend off (misguided) critics of the Bank’s LSAP monetary policy programme.   That isn’t a good or acceptable use of the powers of the state. 

To the extent the initiative is about protecting borrowers from themselves – as your communications sometimes suggests – it may be nobly intended but is no part of the Bank’s statutory responsibility (and thus not a legitimate basis for use of regulatory powers). Perhaps as importantly it seems to assume the current crop of central bankers and regulators knows more about the risks of house prices falling substantially and sustainably than (a) borrowers and their bankers (each with money on the lines) and (b) than their central banking predecessors over 30 years did (each Governor having at some point or other anguished about the risks of falls, even as central and local government policy continued to underpin the decades-long scandalous lift in real house prices). No evidence is advanced for either proposition.


My former Reserve Bank colleague – now Tailrisk Economics – Ian Harrison had a similarly cynical view on the consultation process but also put in a short submission, which he has given me permission to quote from.

Ian makes a number of serious analytical points about the substantive weaknesses in the Bank’s document


It is clear that, from the content of the consultation paper and the time given for submissions, the consideration of submissions and final decision making, that this is not a serious consultation, and that submissions will mostly be ignored.  In that vein not all of this submission is entirely serious.  Part A discusses some key elements of the Bank’s analysis.  It shows that the Bank’s concerns appear to be driven by a data error and a lack of understanding of how loan portfolios evolve over time.

The Bank has suppressed lending to housing investors following the Minister’s wish to give first time homebuyers a better chance of securing a property.  Now that this demand has emerged the Bank wants to choke it off. 

This is based on an almost irrational obsession with housing lending risk.   Even when high LVR loans are a small part of banks’ portfolios, and its own stress testing shows that housing losses will account for a relatively small part of overall losses in fairly extreme stress events (about 28 percent), it does not seem to be able to resist tinkering with quantitative interventions.

The easiest and most effective solution to the identified problems would be to increase housing interest rates, but that option is not even mentioned.

Part B of this submission provides a different professional perspective on the Bank’s behavior.

But sometimes points are made more potently – at least in responding to unserious spin masquerading as policy analysis – by satire. And this is Ian’s Part B

Part B 

Meduni Vienna, Department of Psychiatry and Psychotherapy

Währinger Gürtel 18-20
1090 Vienna, Austria 

Consultation report

 Patient : R. Bank 

Date:   7/9/2021


From our consultation with the patient R. Bank we observed the following clinical symptoms.  Our consultation conclusions are based on the patient’s writings (in particular the document loan-to valuation ratio restrictions) and our observations of behavior over the last three years.

Moderate paranoia: The patient had a tendency to blowup the risks of everyday life into impending disasters.

Hyperactivity: There was a pronounced tendency to do things when nothing needs to be done.

Megalomania: The patient exhibits the classic signs of megalomania: overestimation of one’s abilities, feelings of uniqueness, inflated self-esteem, and a drive to maintain control over others.

Misplaced empathy:  The patient exhibited some concern that others may make mistakes but uses this as a reason to exercise control over them.

Irrationality: There was a lack of capacity to identify real problems and connect them with solutions.

Unwillingness to listen to others:  The patient will pretend to listen to alternative views but this is almost always a sham.


  • Heavy sedation
  • Counselling

The patient should be removed from positions of authority until there is a pronounced improvement in behavior.

Albert Pystaek Phd., Dip. A.E.M, Fm.d, Head of Clinical Psychiatry