More house lending controls to come?

As we all know, the Reserve Bank is in a difficult spot.

It can't easily raise rates. It probably doesn't want to anyway, since (as I've argued before), overall monetary policy conditions are already too tight. But even if it did, the Kiwi dollar would appreciate, or at the very least not fall to the levels the RBNZ would like: "The upward pressure on the TWI reflects several influences but primarily investors have been attracted by the broad strength of the economy and our higher interest rates", as the Governor's speech last week said (it's here as a web page and here as a pdf), and wider interest differentials in NZ's favour would clearly make the fight on the NZ$ front more difficult (as is already the case with the A$/NZ$ cross rate after the Aussies' cut in interest rates).

It can't easily lower rates. There's an argument that the low oil price has lowered any inflation risks, and another (which I'm partial to) that, in hindsight, it overtightened with its latest OCR increases, but cutting rates in the middle of a boom would still be rather odd. "New Zealand is the only country among the advanced economies that has had a positive output gap in the past two years, our unemployment rate is low and falling, net inward migration and labour force participation is at record levels, and business and consumer confidence surveys remain strong", as the Governor said, plus it would make the housing market even more exuberant - "we have already seen some effective easing of credit conditions with declines in fixed-rate mortgages, at a time when we have financial stability concerns about accelerating house prices in Auckland".

So by default it's stuck with leaving interest rates where they are, which means that its financial stability headache over Auckland house prices doesn't go away, or even gets progressively worse - floating mortgage rates stay where they are (or even drop a bit if the banks' marketing wars heat up a bit more), while fixed rates fall as long maturity bond yields remain very low overseas (essentially we're lumbered with importing world bond yields, plus a credit/risk premium).

All of which leads you to think that there may be another round of "macro-prudential" regulation around the corner. We've got the existing regulation - only 10% of new bank lending on houses can have a loan to value ratio (LVR) higher than 80%, or put another way, 90% of new lending must have at least a 20% deposit - but while it's had some impact, it doesn't look as if it's been enough to rein in the Auckland market in particular. Prices in an already expensive market are up another 13% in the year to last December (on the latest REINZ data),

Yes, there's more going on than just easy credit. As the Governor said, Auckland prices reflect a melange of "rising household incomes, falling interest rates on fixed-rate mortgages, strong migration inflows and continued market tightness". But there's still a financial stability issue. When these factors ease, or reverse (eg when housing supply finally come on strong), banks risk being left with big loans on lower priced assets. So you'd reckon the RBNZ must be looking in the cupboard for another macro-prudential stick.

As it happens, there's a brand new model for them to have a look at, and that's the Irish Central Bank's. The Irish had one of the biggest housing market busts of all time - the national house price halved, almost exactly, between the peak in September '07 and the trough in March '13 - and, to put it very mildly, are not keen to see a repeat. With Irish house prices up 16.2% over the year to last December, they've just stepped in with a package that combines LVR ratio limits and loan to income ratios. You can read the whole thing in the Bank's FAQ here: the gist is a 3.5 times income limit for all new loans except loans to buy rental properties, a 20% LVR ratio limit for most mortgages, a 10% first time buyers' LVR limit up to €220,000 (about NZ$340,000), and a 30% LVR limit for rental property loans. There's room for the banks to do some business outside these limits (20% can be outside the income limit, 15% outside the LVR limits).

Interestingly, one of the questions in the FAQ reads, "Has the Central Bank considered that these measures may be discriminatory against people looking to buy in Dublin and the surrounding areas?" The Irish Central Bank preferred to downplay that aspect - it says, yes, but only a bit - but that's exactly the sort of selective impact we'd like to see happening in Auckland.

"We will be talking more about the housing market over the next few months", the Governor said last week. I wonder if they'll be talking with an Irish accent?