Housing is topical. Housing is easy for a journalist with a BA in Media Studies to understand. Housing articles drive traffic for online ad impressions and listing revenue. But are high LVR restrictions really the answer to perceived problems with house prices?
Basel III capital and liquidity requirements are not topical, but when it comes to financial stability they are pretty much the global tool that is so much better than market specific intervention despite the fact that imposing higher loss reserves on certain types of lending can have supply side impacts because a lot of growth can only occur because there are capital costs that have to be financed by a bank.
The Reserve Bank response to submissions I wrote about yesterday is an example of why market specific (house prices are in a b*****! we must act now!) interventions with a good goal like improving financial stability and lowering systemic risk through avoiding a lot of mortgage writedowns if house prices ever fall and high LVR borrowers have negative equity, are not necessarily a good idea.
This sort of regulation is “good” in the sense that the RBNZ really cares about financial stability now it has some fancy new macro-prudential kung fu to implement. It isn’t good in that there is barely any discussion of basic supply and demand factors affecting house prices, particularly in Auckland.
But anyway the focus on housing is really crazy in light of how massive Basel III capital and liquidity requirements are in terms of changes to bank lending processes and risk management processes.
It’s like worrying about rules for adding a conservatory to your house when the global building authority has issued a mandate saying “you have to use office tower strength reinforced concrete with earthquake shock absorbers for your residential foundations”.
My dream is that one day more people will be as passionate about supply side effects flowing through from higher capital and liquidity requirements before even thinking about the enhanced (negative) supply side effects high LVR restrictions could have.
Remember all of those finance companies? They were providing the risk capital that built most of the apartment buildings and subdivisions to get to a point where New Zealand still doesn’t have enough apartments and houses on decent sections.
Now, banks can’t lend like some of their more aggressive property lending teams did pre-2008 and the second tier finance sector has restricted itself to “sure thing” deals. The other alternative is hedge funds looking for extremely high rates of return for short term loans that won’t ever be capitalised.
Why oh why can’t we have a better media? This stuff isn’t hard to get your head around. It’s just a basic supply and demand story. Supply of housing is restricted both by lower credit availability and by council and environment court red tape. Add in a demand curve shift to the right from immigration and this could have been an ECON101 essay question.