While positive economic indicators abound in the economy,
fish-hooks remain with New Zealand's troublesome housing
sector, with the Reserve Bank and Business New Zealand
clashing over the controversial loan-to-value ratios (LVRs)
being imposed on banks.
On the eve of formal introduction of the LVRs on Tuesday,
Business New Zealand is questioning its application as being
a ''stop gap'' measure to delay raising the record low
interest-driving official cash rate.
In the Reserve Bank's annual report yesterday, Governor
Graeme Wheeler said ''the two most significant challenges''
facing the bank were the overvalued New Zealand dollar and
overvalued housing market.
Business New Zealand economist John Pask said views were
mixed on the ''relative merits, or otherwise'', of the
Reserve Bank's LVR, which the bank had been careful to
justify as ensuring the ongoing strength of the country's
''It is hard not to interpret this latest move as simply a
stop-gap measure to delay raising the official cash rate,''
Mr Pask said in a statement yesterday.
Mr Wheeler said while the high dollar benefited import
purchasers and kept inflation levels low, it was ''creating
difficult headwinds for New Zealand's export and import
LVRs are one of four ''macro-prudential tools'' developed by
the Reserve Bank, and from Tuesday banks must have a maximum
exposure of only 10% of their overall lending book of loans
to customers with cash deposits of less than 20%.
Mr Wheeler said the macro-prudential tools were required to
reduce the risk of a ''substantial downward correction'' of
house prices which would damage both the financial sector and
''These are designed to help slow the rate of housing-related
credit growth and house price inflation.''
The Reserve Bank's main concerns were that rapidly increasing
house prices ''increase the likelihood'' of a ''significant
and disruptive'' fall in prices in the future.
While an economy might be growing close to its growth
potential, experiencing sound fiscal policy and price
stability, the global financial crisis demonstrated economic
and financial risks built up for several reasons, he said.
Mr Pask cautioned that high household debt was a continuing
''When interest rates rise again, the cost of servicing high
debt levels will adversely affect households.
''It will also likely impact on the New Zealand dollar to the
detriment of exporters.''
Mr Wheeler said New Zealand's house prices, in comparison to
household disposable income and rents, were high by
Mr Pask highlighted construction, global commodity prices,
high consumer and business confidence and improvements in the
economies of Australia, China and the United States as all
boding well for exporters.
''Data coming out of the major world economies shows recent
improvement, which is good news for New Zealand exporters.''