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Experts agree on property market regulation

Reserve Bank of New Zealand (RBNZ) should have access to macro-prudential tools to regulate the market better and protect the financial system from going bust, former Reserve Bank of New Zealand Governor Dr Don Brash has said.

He said that counter-cyclical capital buffer is one of the best options.

Speaking to the Massey University Business Student Group based in the Albany Campus (Auckland) on August 2, he said that RBNZ was considering four macro-prudential tools to cool the property market.

“The counter-cyclical capital buffer requires banks to hold more capital during credit booms. However, RBNZ currently favours restricting Loan-to-Value Ratios (LVRs) for mortgage lending,” he said.

Among the other experts who spoke to the Group included AMP Chief Economist Bevan Graham, Associate Professor & Massey Centre for Financial Services & Markets Director David Tripe, and RBNZ Acting Head of Economics Tim Ng.

They spoke on the topic, ‘This Is Your Livelihood – Contemporary Monetary Policy Challenges in New Zealand’, suggested by the Student Group.

According to them, commercial banks should be required to hold more capital to protect the financial system from a potential bust in the property market.

Alternative needed

Dr Brash said that interest rate increases would not provide a solution.

“Whenever a herd mentality develops around any asset class, as there is around property, it is very hard to see any plausible interest rate change dampening that down; 8%, which is where interest rates were before the global financial crisis, did not have an impact. 20% might, but that would do significant damage to the rest of the economy. There is therefore the need for another instrument,” he said.

Mr Graham agreed, saying that counter-cyclical capital buffers had a greater role.

“If this is about financial stability, then banks holding more capital if things go pear-shaped is a good thing,” he said.

Professor Tripe also believed that the counter-cyclical capital buffer was the best way for RBNZ to deal with property booms.

“The best protection against a bust in property prices is the banks, collectively, to be more strongly capitalised so that they are protected individually against the failure of other banks,” he said.

He discounted the argument that the tool would take too long to implement to have any immediate effect.

“One of the arguments for restricting LVRs is that it can be implemented quickly. But if the banks knew today that they would need to hold higher capital levels as of March 2014, they would think about the lending they are undertaking now. We could see them cutting back on their lending more generally.

“Meanwhile LVRs might restrict some bank lending, but it would not stop people bidding for expensive properties. Other sources of funding are always available,” Professor Tripe said.

According to Dr Brash, the best instrument for dealing with the property bubble is releasing more land, which is not under the control of RBNZ.

“That is what drives the bubble in Auckland land prices. When you have to pay $400,000 for an eighth of an acre in Flatbush, you know that you have got a bubble,” he said.

Financial stability

Mr Ng conceded that RBNZ faced the formidable challenge of achieving financial stability in the economy.

“It is not at all easy, and it is relatively new territory at least in the sense that, prior to the global financial crisis, the prevailing philosophy was that you did not really have to worry about the activities of the financial system in generating financial instability. Since the crisis, most people have said that was obviously wrong, and there has been considerable international focus on reducing risks to the financial system.

“With macro-prudential tools, we are in the second-best to third-best world. Macro-prudential tools build on the existing prudential framework to promote financial system stability. With house prices rising, with no evidence of stopping, we are trying to protect the banking system. The more enduring solution would be to fix constraints in the housing market at various points in the building process,” Mr Ng said.

Majority view

Audience participation was encouraged through a live, online platform called ‘Xorro.com,’ which allowed people to post questions to the panel and answer survey questions during the discussion.

The audience was asked what they believed was the best tool for dealing with the overheated property market. The most common answer was ‘Introduce a Capital Gains Tax’, followed by ‘Release more land for residential developments’.

Photo :

Bevan Graham, Dr Don Brash, Tim Ng and David Tripe at the Massey Panel

(Picture courtesy: Massey News)

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