English and Ardern raise concerns with RBNZ's loan-to-value ratio limits, and debt-to-income ratio work, while 'respecting' RBNZ independence

By Alex Tarrant

The Reserve Bank has been the target of what could be argued are veiled threats from both major political parties in the lead up to September’s election about its on-going imposition of loan-to-value ratio (LVR) restrictions, and warnings that debt-to-income (DTI) ratios are not political flavour of the month.

Prime Minister Bill English and Labour Party leader Jacinda Ardern maintained they would respect the Bank’s independence. But both on Tuesday morning hinted at dissatisfaction over how LVRs were impacting first home buyers.

Their comments come after the Real Estate Institute (REINZ) last week called on the Reserve Bank to remove LVR restrictions on first home buyers. You can read David Hargreaves’ take on that here.

First home buyers in focus as election nears

On LVRs and DTIs, English was first up on his way into the National Party’s weekly caucus meeting in Parliament Buildings. Asked his thoughts on whether it was still appropriate for the RBNZ to be imposing LVR restrictions, he replied that was a matter for an independent Reserve Bank. But he also encouraged the Bank to at least have in mind what economic conditions would allow for removal.

“They put them in place. I think it’s pretty clear now that the market is, [with] that policy along with a number of others, has got prices flattening off – takes a bit of pressure out of the market,” English said.

“The Reserve Bank makes those decisions according to their views about financial stability. So, I would expect that they’re doing work on what conditions would have to be met to remove them, but there’s no indication at the moment that they’re going to.”

English acknowledged the macro-prudential tool had made it tougher for some first home buyers. “It was designed to put some restrictions on that, and it seems to be having its effect.”

This was why government was helping this class of buyers through HomeStart grants and by allowing KiwiSaver withdrawals; 30,000 first home buyers had taken advantage of this so far, and there was enough funding for another 60,000.

“In time, you would expect that the LVR restrictions would be looked at by the Reserve Bank. So far, there’s no indication that they are,” English said. “In my meetings with them I’ve said to them that I would expect that they’re thinking through what the conditions would be. But it’s their decision…”

Asked whether he thought the Bank needed to be thinking about ‘taking a break’ on the policy: “Well a good regulator would do that. If you bring something in as a temporary measure, then you should be clear about what’s involved in removing that.”

Was that comment a message to the Bank? “They were always meant to be temporary measures, so they need to think about what conditions would be in place to remove them. But I have to say, there’s no indication at the moment that they’re going to remove them right now. And the market…is flat and in some places falling,” English said.

However, he again reiterated that relaxing LVR restrictions was a matter for the Reserve Bank. “I’m not here to tell them what to do.” English said government was not going to make the decision for them and that he did not want to give the public the impression that politicians could decide to remove them. “The Reserve Bank decides that.”

Housing market correction

Meanwhile, English welcomed the recent correction in the housing market, with annual price rises falling from near 20% annually to near flat currently. “We’re seeing some sort of correction, we’ve yet to see how it will flow out,” he said.

“Some real estate agents are saying that, because of the election, that’s prolonging what would usually be a quieter winter period, and that prices might pick up again after the election. That might depend on the certainty or otherwise of government policy.”

A flattening of the market meant a bit less panic for people looking to buy, English said. “I think it’s a good thing that prices have flattened out. Everyone gets a bit of time to think about what they can afford, we’re able to get on with supporting the building of 200,000 more houses over the next six years, and gearing up the infrastructure that goes with that.”

That there had been a correction in the New Zealand housing market was “pretty obvious,” he said. “Prices were rising at 15-20% per annum; they’re now rising at – it’s pretty much flat – and I think that’s progress.”

Asked how long that would have to last before he thought the Reserve Bank could remove LVR restrictions, he said: “You’ll have to talk to the Reserve Bank. But it raises the question of how long they will be there for. It’s important that the people who put them in place have thought through the conditions under which they remove the LVRs, because, ideally, they are not a permanent feature of the market.”

English was then asked on his views of the Reserve Bank perhaps imposing debt-to-income ratio limits. He acknowledged further tools were being examined, and if there was a need for them the government would be open to it. “But we don’t see the need at the moment,” he said. “We won’t be looking at them before the election.”

‘Labour never favoured LVRs’

Labour’s Ardern said she had heard plenty of personal stories from individuals who had really struggled to buy a first property because of the existence of LVRs.

“We’ve never favoured them, but we’re also very clear that they’ve been introduced by the Reserve Bank because not enough has been done by the government to ease the pressure on the housing market. So, this is something that they’ve made a decision on because of that inaction,” she said.

“We’d like to see them gone but we’re not going to remove the independence of the Governor of the Reserve Bank.”

On DTIs: “We’ve never favoured them either,” Ardern said.

Labour would focus on removing the circumstances under which the Reserve Bank might feel it had to use macro-prudential tools by easing the pressure on the supply side through initiatives like Kiwibuild.

“But we’ve not proposed removing their ability to set those…use those tools,” Ardern said. “We’re not taking away their discretion and independence.”