By Bernard Hickey
Tension is growing between the Reserve Bank and the Government about how proposed 'speed limits' on growth of high Loan to Value Ratio (LVR) mortgages might affect first home buyers.
Prime Minister John Key was adamant on Thursday that the Reserve Bank measures would not hit first home buyers too hard, while Reserve Bank Governor was equally adamant that first home buyers would have to be included within the speed limits to have the desired effect.
"I've discussed the matter at length with the Reserve Bank Governor, including last night, and I'm convinced we can navigate a way through which means that the banks have less loans which are more leveraged, but continue to make sure there's opportunities for first home buyers to have higher degrees of leverage," Key told reporters in Wellington.
He was speaking after Wheeler reiterated the bank was considering 'speed limits' on the growth of high LVR loans. The Governor stood firm in a news conference after the bank's June quarter Montary Policy Statement against suggestions first home buyers be 'carved out' or exempted from the limits, as they have been in other countries.
It was clear at a subsequent select committee hearing the issue of first home buyers continuing to have access to high LVR loans is heating up as a political topic, with National Government MP John Hayes questioning the development of the LVR speed limts.
Key pointed to other countries that have carved out first home buyers and said he was talking with the Reserve Bank to ensure first home buyers still had opportunities to borrow with low deposits.
"I for one would not support a situation where first home buyers are completely locked out of the market," Key said.
"The people we're wanting to get into the market are first home buyers," he said.
Key was then asked if first home buyers would be 'carved out' or exempted from the speed limits.
"I'm not sure absolutely that there'll be a carve-out, but I think the banks will have flexibility on how many of those loans are of a higher leverage nature, and making sure that first home buyers are part of that group is going to be important," Key said.
"There's a balance to be had here. I’m pretty confident between the commercial incentives of the banks, and the judgment of the Reserve Bank, and the influence of the Government, we'll be able to navigate a way where they stay in the game."
Earlier Wheeler said the bank had to include first home buyers in its planned speed limits because they made up about a third of high LVR lending, which itself made up a third of all new lending.
Wheeler pointed to how other central banks, including those in Israel, Norway, Sweden and Korea, had introduced more absolute high LVR limits with 'carve-outs' for first home buyers. The Reserve Bank was, instead, looking to limit the overall growth of high LVR lending to a certain percentage through speed limits that applied to all high LVR lending, rather than just for investor or second and third home buyers.
"If you look at what many countries have done, they've carved out exemptions for first home buyers, but then put absolute constraints/limits on all other high LV lending. The thing we looking at, given that first home buyers are roughly 30% of the market for new mortgages, is whether we should bring in speed limits," Wheeler said.
He was asked directly if the Reserve Bank would carve out or protect first home buyers.
"Carving that out would be a big exemption in terms of mortgage pressures. We haven't made up our mind at this point. We're out consulting with banks. First home buyers are a very significant part of the market and the Auckland market is experiencing very rapid house price appreciation," Wheeler said.
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