New Zealand has adopted a maximum 80 per cent loan-to-value ratio (LVR) rule in a bid to curb risky lending, which some economists believe may eventually end up in Australia.
With the property market accelerating faster than other areas of the Australian economy, the Reserve Bank of Australia (RBA) may eventually find that certain areas of the economy need higher rates while others sectors require rates to remain low.
Speaking with The Adviser, chief economist at AMP Capital Shane Oliver said it’s certainly a possibility for Australia to borrow the idea from New Zealand.
“New Zealand is a little ahead of Australia – the upswing in the NZ economy is a few steps ahead of us so we can use them as an indicator of where things may end up," he said.
“Weighing up the pros and cons, if the broader economy hasn’t picked up, and the Australian dollar remains strong – then I think the Reserve would have to consider capping lenders to a maximum LVR of 80 per cent.”
While Mr Oliver admits that it would work against first home buyers, who typically have lower deposits, it would be preferable to raising interest rates when the rest of the economy needs lower interest rates.
Despite both the Reserve Bank of Australia and the Australian Prudential Regulation Authority (APRA) warning lenders to not become lax on lending standards in the past month, chief economist for HSBC Australia and New Zealand Paul Bloxham remained sceptical that macroprudential regulation would make an appearance in Australia.
“If you get your microprudential settings right, and you get your interest rate settings right, then you shouldn’t need to implement tools like this," he said.
“The comments we’ve seen from the RBA and APRA over the past month are the system working; they don’t need to implement blanket rules like New Zealand has, they just need to remind banks to remain cautious in their lending standards.”
However, Mr Oliver believes that if the warnings fall on deaf ears, the RBA may replace the carrot with the stick.
“But I personally believe that there are other approaches with a proven track record, which will be more attractive to the RBA, but we’ll have to wait and see how the New Zealand economy reacts to this,” said Mr Oliver.
International director financial institutions at Fitch Ratings Andrea Jaehne told The Adviser that comparing New Zealand’s situation to Australia’s forecasted predictions was difficult.
“You would need to come up with a lot of similarities to say whether it’s right for Australia or not, but from what we can see, the two countries are very different," she said.
“Given the development of their housing market and their wider economy, we clearly see this as a positive because it limits potential risk in the housing market.
“While this is good for New Zealand, it’s tempting to say it would be good for any other country, but each individual circumstance must be taken on a case-by-case basis.”