Tony’s Comment – Reserve Bank Restrictions

In all of my 35 years in banking I have never seen such hype and speculation around the banking system and the controls that may be placed on it. It seems credit rationing is just around the corner with the likelihood that in September the number of high ‘loan to value ratio (LVR) loans approved by lending institutions will be reduced from 25% of all loans approved, to 12%.This tool may have little effect on the galloping house prices in Auckland and to a lesser degree in Christchurch. The main group that will be affected by such a policy are the first home buyers. Others will have the equity anyway.

One of the reasons that New Zealand came through the global financial crisis so well was due to the fact our banks are strong and well run. Poor loans do not get approved and controls on banks are unnecessary as there are credit managers sitting in our banks (mainly in Auckland) only approving good quality loans. Bad loans reduce profits and share holders do not like that! First home buyers are often double income/no kids, so have the greatest disposable income – cash pays a mortgage, not equity. New Zealand is a great country in so many ways, relating to the economy and industry being largely de-regulated, so it is sad that this going to happen. For example, I wonder where our farming industry would be now if subsidies weren’t scrapped when they were? The industry was made to become efficient and it is our greatest success story. Also, LVR restrictions won’t work anyway as people will innovatively find their way around them via parents, second mortgages, KiwiSaver enhancements etc.

I suppose a by-product of the LVR controls is low interest rates for longer. As the New Zealand dollar is high the OCR is not likely to move quickly, and when it does move it may only be a minor increase, hence the perceived need for the controls.

I say, let the price set the market!

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