Why does all of this matter? Auckland house prices seem well deserving of a policy response – should we not welcome the RBNZ’s continued attempts to chisel the peaks off of this mountain?
Unfortunately, the policy move itself has substantial risks. We have yet to see any assessment of the costs that designating a new asset class might impose on the banks that will have to comply with the regulation. There will be tricky boundary cases: if a buyer secures a loan against his existing property and against a new purchase, with intention of selling the former after the move, would that count as an investor or owner-occupied purchase for application of the LVR?
But the more important risk is to RBNZ credibility and independence. New Zealand pioneered central bank independence and the world followed. The Policy Targets Agreement which forms the basis of the Bank’s operational independence is a thing of beauty. But the Bank’s independence is only politically sustainable to the extent that it complies with its mandate and does not undertake actions that fall outside of its mandate.
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