Sunday, July 21, 2013

The toughest policy option–leave it alone

The debate over LVR regulation has become needlessly complex – the utter farce is that there is very widespread knowledge of the lunacy involved.

  1. If you prevent banks lending someone else will lend. Likely at a higher interest rate thus adding to the “risky housing debt” problem you set out to solve. Fail. And likely made things worse. Just don’t.
  2. If the object is to lower house prices and you assist someone to pay the price via an exemption or like workaround you just failed in your objective – worse everyone pays the price of the failure since workarounds are not free to administer.

If you do nothing, either:

  1. People conclude life is tough and adjust their aspirations down to their budget in the current market; or,
  2. People think more broadly in adjusting and think beyond living in Auckland or inner Auckland; or,
  3. People do borrow at excessive rates for their budget, get burned – nay fried – and learn a lesson nothing else will teach them; but,
  4. You do not impose the cost of their learning on all other investors and buyers; and,
  5. You have the satisfaction of being able to say “I used my brain, didn’t react on a short term ad hoc basis, and did what I know is correct in the long term.”

Just as an aside - imposing an LVR regulation will likely increase fiscal instability because of the higher variability of credit and default performance in non bank lending – that may be a breach of the Reserve Bank legislation which calls for the RB to maintain stability.

Testicular fortitude in this policy area please….

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