I am struggling to understand the learning process – or perhaps it is the “benefits to denial” - as I watch the Reserve Bank go through the final motions of regulatory design as they prepare a scheme to prevent banks lending below certain loan to value ratios.
I am unconvinced that each and every economist and official involved is not aware that such schemes:
- fail in their objectives
- generate unintended consequences
- distort price signals
- raise the cost of lending
- generate perverse incentives
and that’s just the main efficiency effects. On the equity side they
- penalise those least able to afford housing
- deny the poor access to capital markets
- drive such capital as we have into the arms with lesser need for it.
We have done all this before. We have seen all these effects. We know the policy idea is flawed. Being in denial is unhelpful. So why? These guys get paid even if they don’t do it.
A better idea – for Auckland at least – would be to recommend strongly that the government gets rid of the school zoning regulations which drive several millions (which parents evidently are prepared to spend on education) into housing stock in favoured zones tying up capital, pushing up the price of housing all across the market and distorting prices.