Diminishing Marginal Returns To LVR Restrictions

This paper from the RBNZ on the potential impact of LVR restrictions is interesting.

The net effect of this is that credit growth is expected to be about $3.2 billion lower over the first year that LVR restrictions are in place. This would lower annual housing credit growth by 1.7 percentage points in the first year. The longer LVR restrictions are in place, the more likely it is that borrowers would be able to find alternative sources of funding and alternative buyers would enter the market. As a result, we expect that LVR restrictions would have a diminishing effect on credit growth after the first year.

While I think that loan to value restrictions are basically saving young dreamers from negative equity and restricted options in the labour market (can’t move for higher wages if you’re stuck with a mortgage), the Reserve Bank is putting its independence at risk.

Nothing is more sacred in New Zealand than the home ownership cow. It’s even more sacred than dairy cows themselves, and that’s saying something considering the handouts dairy farmers get to help their capital gains farming.

Thus, as the election comes closer, I would not be surprised if there was a bipartisan consensus on a raft of further exemptions for “struggling young first home buyers” without any consideration of how stupid the obsession with home ownership is.

It’s almost as if politicians didn’t learn anything from the Global Financial Crisis, the sub-prime mortgage market and what happens when you start giving exemptions and subsidies and special treatment to facilitate a policy outcome that has fuzzy outcomes attached.