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The Bank of England’s new approach to mortgage restrictions better targeted than LVR policy

A new Insight from the New Zealand Institute of Economic Research (NZIER) says the Bank of England’s new approach to managing financial stability risks is better targeted than New Zealand’s loan-to-value (LVR) restrictions.

"We like the Bank of England’s proposed restrictions on high loan-to-income (LTI) mortgages better than New Zealand’s LVR restrictions.” said Dr Kirdan Lees, Principal Economist at NZIER.

“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.”

High LVR mortgages only tell you that house purchases are made without much collateral. But LVR restrictions do not take into account households’ long-term ability to service debt.

The Bank of England has a policy solution to a well-defined problem: stopping soaring household debt that sits at the heart of financial stability risks. Controlling house prices is not part of the Bank of England’s problem.

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.

For further information please contact:
Dr. Kirdan Lees
Principal Economist, Head of Public Good Research
021 264 7336

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