Macroprudential tools, such as loan-to-value restrictions, have modest effects that tend to be short-lived, Westpac economist Michael Gordon says.
The bank’s economists say that while the tools are not mainstream internationally, they have become popular in other countries that are facing similar conditions.
Their research showed effects of macroprudential tools lasted only up to about six months, and the impact was on the rate of growth, not the level, of house price rises and household credit growth.
“Households have generally continued to leverage up after restrictions were introduced, though perhaps less than they might have otherwise.”
Gordon’s report said price-based measures – that altered the cost of credit – appear to be more effective than quantity-based measures. “There is often some underlying factor that contributes to the excessive heat in the housing market (aside from low interest rates). An under-supply of new housing is a common feature, though not a universal one. “
Other factors included regulation of the rental market or favourable tax treatment.
“Macroprudential policy can’t fix these underlying factors, and at worst could sap the resolve of policymakers to address them. That raises the risk that macroprudential restrictions, rather than being used in a time-varying manner, could end up becoming a permanent feature.”
Gordon said that as it became clear that the LVR restrictions would only have a limited effect in New Zealand, it was possible that the RBNZ would further tighten the speed limit or reach for other macroprudential tools, too.
South Korea introduced LVR restrictions in 2001 and in 2005 they were combined with caps on debt servicing to income ratios. Together, these restrictions were tightened 12 times and loosened five times between 2002 and 2010.
Studies by the Bank of Korea have concluded that the tightening measures that applied at the national level helped to slow the rate of increase in house prices and household debt over a three- to six-month horizon. There is also some evidence that they reduced loan delinquency rates for banks.
But the government also introduced transfer taxes on the sale of second homes, ranging from 6% to 60%.
In Canada, refinancing of a loan is now capped at 80% of the home’s value, which limits the extent to which homeowners can convert unsecured personal loans into cheaper secured mortgage debt (with taxpayer-funded protection for the lender).
A recent IMF study found that the LVR cap imposed in 2008 had no lasting impact on house price or credit growth, but that the more price-based measures in 2011 and 2012 were more successful.
But since early this year, house price growth has started to pick up again and house sales have risen 11%.