Measures by the Reserve Bank of New Zealand (RBNZ) to contain the country's overheated housing market are failing to tackle potentially destabilizing household debt, an independent economic think-tank warned Wednesday.
The RBNZ introduced tighter loan-to-value (LVR) restrictions on mortgage lending in October last year, saying soaring house prices could derail the country's financial stability and economic recovery, but they neglected soaring household debt, according to the New Zealand Institute for Economic Research (NZIER).
Restrictions on high loan-to-income (LTI) mortgages, such as those introduced by the Bank of England, would be more effective in stabilizing the market and the finance sector, said NZIER principal economist Kirdan Lees.
"Restrictions on high loan-to-income mortgages directly address the risk that the Bank of England is worried about: that very high household debt could cause a sharp economic correction in the future," Lees said in a statement.
High LVR mortgages only indicated that house purchases were made without much collateral and the LVR restrictions failed to take into account households' long-term ability to service debt.
The Bank of England had a policy solution to stop soaring household debt that was central to financial stability risks.
"LVR restrictions will constrain risky lending, but the gains look to be limited and the policy carries some unintended consequences. We should look at LTI restrictions, as they are better targeted at the risk of financial instability created when many people cannot repay their debt," he said.
The RBNZ has indicated that the LVR restrictions could be eased from later this year, but it has raised the official cash rate by 25 basis points three times this year to its current rate of 3.25 percent.