Last month I wrote about house prices rising and the calls for more regulation. Unfortunately the calls for more regulation have been heard and the Reserve Bank is looking to introduce loan-to-income restrictions for mortgages.
This type of regulation has already occurred in the UK, where many borrowers are restricted to borrowing no more than 4.5 times their annual income.
However unlike the UK, where rental property loans are exempted from the new loan-to-income ratios, the NZ Reserve Bank is actually looking to include them.
Some politicians and media commentators are saying that New Zealand should do the opposite from the UK and only apply the restrictions to rental properties. They view this as a fight between investors and first home buyers.
However these types of regulations are attacking the symptoms of higher house prices rather than the causes. If anything we probably need less regulation.
It could be argued that overly complicated and expensive building regulations are the main cause of house prices rising. It is generally accepted that we currently have a supply problem, but we are also very slow at building more homes because of overly complicated regulations.
Even land designated as a Special Housing Area, which was a classification introduced to substantially reduce the time to make land available for housing, is taking years to get building approval.
The Reserve Bank's answer to the housing supply issues caused by over regulation is to regulate demand. More regulation does not address the core problem and will almost certainly have unfair and unintended consequences.
Sometimes we just need to ride out certain situations rather than attempting to control them. This is not ideal, but neither are the consequences of un-required regulation.
We currently have a net migration increase of over 67,000 people. Most of this is due to New Zealanders either returning from living overseas or choosing to stay in New Zealand when previously they may have gone overseas. Government could choose to stop foreigners coming to New Zealand, but this would also affect our general economy. Educational institutions would be one badly affected industry but there would be a lot more.
Government and Councils could also make some hard decisions around building regulations and seriously speed up the process. This would be difficult but would have a really positive effect on housing supply, which is what we really need.
We should leave it to the banks to establish the risk of individual borrowers rather than allow the Reserve Bank to enforce clumsy and wide reaching income-to-loan restrictions.
If these restrictions are introduced and if they are aimed at rental property owners, it will ultimately hurt tenants and especially potential first home buyers. Rental increases will make it even harder for first home buyers to raise their deposit and this is usually the largest obstacle they face.
There have already been complaints in the media about rental price increases. We just don't need poorly thought through regulation that will no doubt see rental property providers blamed once again for the consequences.