Appendix I. The Impact of LVR Restrictions on the Housing Sector in New Zealand—A Counterfactual Analysis1
Macroprudential measures such as LVR restriction have as the primary goal to increase the resilience of the financial sector but may also help dampen the extremes of the credit cycle. In order to evaluate the impact of the LVR restrictions on credit and house price growth, we update the counterfactual analysis conducted by Price (2014). Extending this analysis, we estimate the impact of the LVR restrictions introduced in November 2015, and update the analysis of the October 2013 LVR limits beyond the initial assessment period.
We estimate the impact of the LVR restrictions on the housing sector projecting counterfactual house and credit growth rates in the absent LVR limits. We proceed in two steps: First, we estimate a VAR that consists of housing-specific and macroeconomic variables using data prior to the announcement of LVR limits by the RBNZ. We estimate the VAR on quarterly data, starting in 1993. The VAR consists of the following 9 variables, which we obtained from the RBNZ and Statistics NZ: (i) net migration of non-NZ citizens per 1000 NZ residents, (ii) net migration of NZ citizens per 1000 NZ residents; (iii) output gap calculated using one-sided HP filter; (iv) floating rate on new mortgage for new customers; (v) number of house sales per 1000 NZ residents; (vi) number of new building consents per 1000 NZ residents (vii) annual real growth rate of average NZ house prices; (viii) annual real growth rate of house prices in the Auckland region, and (ix) annual real growth rate of household credit.
Second, we project the dynamics of the housing specific variables, conditional on the actual behavior of macroeconomic variables, in the periods after the introduction of LVR limits. Thus, for the 2013 LVR limits, we estimate a VAR based on 1993Q1–2013Q1 data, and project housing-specific variables for 2013Q3–2016Q1 period. For the 2015 LVR limits, we estimate the VAR based on 1993Q1–2015Q1 data, and we make forecasts for the three quarters 2015Q4–2016Q2.
The conditional forecasts of housing-specific variables (variables 5–9) are made using the actual paths only of the four macroeconomic variables (variables 1–4) in the forecasted period. Figure 4 presents the actual and the “counterfactual” paths of household credit growth, New Zealand-wide house price growth, and Auckland region house price growth. The counterfactual paths – our conditional forecasts from step two - provide estimates of the behavior of the three variables in the absence of LVR limits. The dotted lines represent the 95-percent confidence intervals around the estimates.
The counterfactual analysis provides mixed evidence on the effectiveness of the LVR limits. While the forecasted household credit growth is above the actual credit growth path following the introduction of 2013 and 2015 LVR limits, the difference is not statistically significant at the 95 percent confidence level. The impact of the LVR limits on New-Zealand average house price growth is not statistically significant neither for 2013 nor for 2015 LVR limits. However, the 2015 LVR limits seem to have reduced the price growth in Auckland area (at least in the short-term).2 Similarly, the counterfactual analysis indicates that both 2013 and 2015 LVR limits have reduced the number of house sales in New Zealand
Igan, D. and Lougani, P., 2012, “Global housing cycles”, IMF working paper 12/217. (Washington D.C.: International Monetary Fund).
IMF, 2016b, “Ireland – Macroprudential Policy Framework”, Country report 16/316, September (Washington D.C.: International Monetary Fund)
IMF, 2014b, “Staff Guidance Note on Macroprudential Policy: Detailed Guidance on instruments,” December (Washington D.C.: International Monetary Fund).
Price, G., 2014, “How has the LVR restriction affected the housing market: a counterfactual analysis?”, Reserve Bank of New Zealand Analytical Note AN2014/03, May.
Rogers, Lamorna, 2013, “A new approach to macro-prudential policy for New Zealand”, Reserve Bank of New Zealand: Bulletin, Vol. 76, No. 3, September.
The RBNZ regulates but does not supervise nonbank deposit-takers. Supervision is undertaken by trustees, who are overseen by the Financial Markets Authority (FMA).
Leverage ratio and D-SIFIs buffers haven’t been implemented in New Zealand for the time being.
The Treasury might need to develop additional analytical capacity on financial stability issues in order to better assist the Minister in this task.
See technical note on stress testing.
The Unitary Plan merges several past planning rulebooks and re-zones Auckland to provide higher density housing for population growth of up to 1 million by 2040. The rationale is that higher density and smaller, better located homes would make the city more affordable
Dairy commodity prices are currently low, and a large proportion of the sector has been experiencing negative cash flow for the last two seasons. As a consequence, nonperforming loans have been rising, although remain at around 1.5 percent. Stress tests of the sector suggests show that NPLs could increase significantly, but in isolation should be absorbed from underlying earnings across other bank assets.
The outsourcing policy requires large banks to have the legal and practical ability to control and execute core outsourced functions. It is designed to ensure that banks have the ability to continue to provide core liquidity, payment and transaction services in the event that one of its service providers fails or becomes dysfunctional, or if the bank itself fails. The Open Bank Resolution policy (OBR) was developed to provide a credible alternative to the use of public funds when resolving systemically important banks. The goal of the OBR policy is to allow a distressed bank to continue its core banking services to retail customers and businesses, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors rather than the taxpayer.
Prepared by Lucyna Gornicka (MCM).