Very Serious Endorsement Of Loan-To-Value Restrictions By Peter Orszag

Perhaps the Federal Reserve has something to learn from the central bank of New Zealand about how to manage a mortgage market. Unlike the Fed, which has been sharply criticized for having failed to keep the U.S. housing bubble from expanding, the Reserve Bank of New Zealand is sounding the alarm over rising housing prices and imposing limits on mortgages.

Source: Bloomberg View Column by Peter Orszag

Peter Orszag is a Very Serious Person. He was Obama’s first Director of OMB and worked in the Clinton White House too. He is also a well regarded economist.

He is now  Vice Chairman of Global Banking at Citigroup – a move that reflects his association with the Robert Rubin wing of the Democratic Party that moves freely between Washington DC and Wall Street.

The fundamental reason housing is getting so much more expensive in New Zealand is on the supply side. Earthquakes in 2010 and 2011 damaged much of the housing stock in Christchurch. In Auckland, land-use regulations — including a zoning restriction called the Metropolitan Urban Limit — constrain new construction. Bill English, New Zealand’s finance minister, rightly believes that these supply problems must be addressed for the housing market to stabilize.

Even so, the Reserve Bank of New Zealand deserves credit. As I learned from conversations in Wellington last week, the mortgage limits are controversial. But they seem likely to help head off a crisis or contain the damage should one occur. Think of how much better off the U.S. economy might have been if the Fed had tried that.

There are a lot of judgment calls being made in assessments like these. What if the supply side issues are not resolved – as in, the low levels of housing construction at present perpetuate for another decade ?

The New Zealand Initiative’s Free To Build report provides some interesting policy suggestions including Community Development Districts loosely modelled on Municipal Utility Districts in Texas.

But I’m leaning towards the conclusion that all of these discussions are just that. Most New Zealanders cannot afford any reduction in house prices / having capital losses imposed through markedly higher levels of construction because they can’t even spell portfolio diversification let alone adhere to it when it comes to exposure to “pwoppity”.