New Zealand finance minister Bill English recently touted the idea of introducing home loan limits to help tame the Australian property market.
The Reserve Bank of New Zealand implemented home loan limits in late 2013 as part of their ‘macro-prudential policy’. In short, they capped the ‘loan to value ratio’ of home loans in order to cool the housing market. (Find out more on ‘loan to value ratio’ or LVR here.)
How do LVR caps cool a hot property market?
Basically, they place a restriction on the quantity of loans that amount to over 80% of a property’s value. This is supposed to have a cooling effect on the housing market.
Did it work in New Zealand?
Reports indicate that New Zealand’s LVR cap only amounted to a marginal difference. But English thinks it’s still important for Australia to consider the option.
On the flipside, HSBC chief economist Paul Bloxham reported to brokernews.com.au that macro-prudential policy had minimal impact on containing the New Zealand housing market.
Therefore, Australia should consider its options before following in its neighbour’s footsteps.
Then why bother?
English told The Business program (ABC) the Reserve Bank of Australia needs to show they are taking the rapidly rising property market seriously. He said that the issue is a risk for the macro-economy and for householders hit with overpricing. Putting a cap on New Zealand’s LVR gave the Reserve Bank of New Zealand a much-needed structure to work within to promote change.
Australia versus New Zealand
According to English, improving supply in the New Zealand housing market is a key concern. He believes supply of housing in New Zealand needs to increase rapidly.
At the same time, the Government needs to deal with public sentiment around the impact of high-density housing.
Overall, English believes that people in New Zealand want to see a balance struck for the benefit of the overall economy.
