Loan to value ratios are homeless political orphans as concerns switch from housing boom to bust


Prime Minister Bill English has scuppered the Reserve Bank's plans to use debt to income ratios.

Prime Minister Bill English has scuppered the Reserve Bank’s plans to use debt to income ratios.

OPINION: They say the only things worse than rising house prices are falling house prices.

And we are living the cliche.

In the past couple of months the election debate about housing has completely switched around from fears of an unrestrained boom to worries about a developing bust.

Labour leader Jacinda Ardern wants to see loan to value ratios "gone".

Labour leader Jacinda Ardern wants to see loan to value ratios “gone”.

Eighteen months ago house prices were rising by 15 per cent. Now they are flat, and in some areas falling.

It has left both major parties recalibrating their campaign messages on what remains a red hot election issue.

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Labour is pressing on with its promise to build, and on-sell, 100,000 houses in 10 years and hammering the lack of affordable housing.

But it will be forced to ease back on apocalyptic warnings that uncontrolled house prices are taking home ownership further and further from the reach of first-home buyers.

And as far as Auckland’s Armageddon is concerned – well, transport and gridlock are suddenly a much easier play with voters than out-of-control house prices.

National is still trying to neutralise its exposure to a lack of supply, a task made harder as statistics consistently show a shortfall.

But the flattening – or worse – in house prices has given it a new compound headache. Falling house prices, aided and abetted by the Reserve Bank’s loan to value ratio (LVRs), have even undermined the “wealth effect” felt by homeowners out there in voter land.

It’s against that background that Prime Minister Bill English gave his extraordinary advice to the central bank this week: You’d better have a plan to take LVRs off, because they were always a temporary measure.

Oh, and you know that request to add debt to income ratios (DTIs) to your arsenal? You know, the one that would further crimp the ability of first-home buyers to get into their first home while adding to the downward pressure on house prices? Forget it.

His comments were immediately seen as a signal to the Reserve Bank; an unusual move in itself, given the jealously guarded independence of the bank.

Word from the Beehive is that English was not meaning to send a signal. He was just answering a question and discussing the theoretical issue facing the bank.

That’s as may be.

Yet it contrasted sharply with Finance Minister Steven Joyce’s approach. He had asked for a cost-benefit analysis from the bank before granting it the extra tool of DTIs and was apparently less than convinced by the case it made.

But he had been assiduously kicking the can down the road, publicly saying neither yeah nor nah.

Then along came English.

Faster than you could say Jacinda effect, he grabbed the can and flung it as far away from National as possible.

If it was not intentional, it was the right call.

LVRs were always a mixed blessing. They put downward pressure on prices, making houses relatively more affordable. But at the same time they made it tougher for first-home buyers to amass a big enough deposit to afford the – theoretically – less expensive homes.

If the Government couldn’t evict them, English could at least let it be known they had outlived their welcome.

With slowing house prices and warnings from the real estate industry that LVRs were acting as a further handbrake, it would have sent all the wrong messages to leave DTIs on the table.

Against a backdrop of softer house prices and unmet demand that would have been toxic to Auckland voters.

What is to become of the LVRs after the election – and when the bank has a new governor to replace Graeme Wheeler – is a moot point.

Dumping them suddenly could risk a renewed surge in house prices.

But if National is leading the government again, then the new governor will be on notice to set an end date.

If Labour’s Grant Robertson is finance minister then LVRs could be tossed out of the tool box entirely by a rewrite of the memorandum of understanding with the bank.

Jacinda Ardern this week said Labour would “like to see them gone” but would not remove the bank governor’s independence.

‘We’ve never favoured them, but we’re also clear they have been introduced by the Reserve Bank because not enough had been done by the Government to end the pressure on the housing market.”

In that comment are the seeds of destruction for LVRs. How could they continue without Labour admitting that it, too, had failed to take the pressure off the housing market?

As the campaign loomed Labour always had the luxury of attacking the unpopular LVRs and having the voters onside. 

But now that National has distanced itself too, it leaves the LVRs tool an unloved homeless orphan.

Over to you, Reserve Bank.


 – Stuff

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