Governments and central banks have more than one ‘monetary policy’ lever available to tame a property boom and our neighbours have demonstrated that they are not afraid to use them. With neighbouring New Zealand recently imposing loan to value (LTV) restrictions on housing loans will Australia follow?
New Zealand now joins Singapore in imposing LTV restrictions and from October New Zealand banks will be required to limit new residential mortgage lending from at LTV ratios of over 80 per cent to a maximum of 10 per cent of the value of their new lending.
Since January this year LTV limits in Singapore have been 50% for individuals with one outstanding housing loan and 40% for those with two or more outstanding loans. Where the loan tenure exceeds 30 years or extends beyond the borrower turning 65, a 20% LTV limit applies. Loopholes have been further tightened recently.
Singapore has now extended controls beyond LTV restrictions to add debt servicing ratios. The Monetary Authority of Singapore requires loan providers to take borrowers' other outstanding debts into account before granting property loans. Under this framework, total monthly property loan repayments should not exceed 60% of a buyer's income. Repayments which work out at more than this amount will be considered "imprudent" by the MAS.
And our other neighbours? Korea introduced LTV controls in 2002 and has changed the level and assets classes from time to time. In 2002 they mandated a 60% LTV and in 2009 added taxation on multiple residential properties to cool the market.
True to form, Hong Kong was an early mover and has used this tool since the early 1990s. Currently in Hong Kong the maximum LTV ratio for properties with a value of at least HK$12 million is 50% and for properties with a value between HK$ 8 million and HK$ 12 million is 60%. The maximum LTV ratio is 70% for residential properties valued at under HK$ 8 million.
In China since 2010, the LTV limit is 80% in general - 70% for first home-buyer and 40% for second home-buyers. There is no lending for third home-buyers and from time to time lending can be stopped entirely!
The use of LTV restrictions is not just limited to our region, although until New Zealand’s recent change Canada and Denmark were the only advanced Western nations to apply them.
The empirical literature seems to support the effectiveness of LTV ratios in taming housing booms.
Some countries have also used direct monetary policy instruments to constrain credit supply during booms, such as limits on the level or growth rate of aggregate credit or specific exposures, and reserve requirements, as well as fiscal policy tools, such as stamp duties on property holding, to tame speculation in real estate markets.
Using taxation and duties in Australia to tame booms would seem difficult in the extreme given the Federal /State tensions around the raising and spending of tax revenue.
Our regulators (APRA and the Reserve Bank) have never favored dampening markets by regulating LTV or debt servicing restrictions. APRA much prefers the tools of active supervision, risk weighting and capital allocation and then leaving the banks to make the decisions. They also favour Basel III counter cyclical “capital buffers” - even if this inherently allows borrowers to fail while protecting lending institutions.
Luci Ellis, Head of the Financial Stability Department at the Reserve Bank recently gave a very strong view against LTV restrictions. She makes an important point that the GFC was caused not by bad home lending (in the USA) but more by the nature of the securities and financial products that fed off these loans (and how they were funded).
LTV restrictions have worked well in Singapore, Hong Kong and South Korea, assisted perhaps because these are effectively constrained single markets. Australia – where the residential market in one state or city can be markedly different from another is quite a different case altogether. With Australian regulators’ strong preference to avoid LTV and the recent change of Commonwealth government it is unlikely we will see such macro prudential tools here anytime soon.
New Zealand is another matter. Now that our Kiwi cousins have lost out to the United States’ Americas’ Cup team, the New Zealand Reserve Banks’s decision to cool (at least the Auckland) residential market may seem a little hasty!
(This article was first published in The Weekend Australian on 24 November 2013)