Reserve Bank's new lending scheme should perhaps exclude property investors - economist

A prominent economist has called for the Reserve Bank to consider putting restrictions on its upcoming funding for lending scheme, fearing yet another explosion in housing prices. 

The scheme, expected to be revealed on Wednesday, will give banks a cheaper source of funding - rather than rely on deposits and private funding, they can access money from the central bank. In theory, this will allow them to lower interest rates without risking the loss of deposits from investors looking to turn a profit. 

"The funding for lending programmes is all about lowering the average cost to banks, get their funding costs coming down," economist Cameron Bagrie told The AM Show on Tuesday. 

"The argument is if you can get the funding costs coming down, that's going to make money available for banks to lend a little bit cheaper."

The problem is cheap credit fuels not just borrowing for businesses, but also the property market. At the start of the pandemic earlier this year, house prices were tipped to plummet along with the rest of the economy.

While spending did drop, temporarily sending the economy into its hardest nosedive in history, house prices just kept on going up "like it never happened", as Kiwibank senior economist Jeremy Couchman put it in September. 

"Borrowers are going to be the big winners," said Bagrie. "The big issue here is, which borrowers do we actually want to win?

"For this programme to be effective, you've got to make it simple - you don't want to have too many hooks. Unfortunately, I think we actually need some hooks in this. I hope it's going to be targeted towards the business sector."

Chrisitan Hawkesby, Reserve Bank assistant governor and general manager of economics, financial markets and banking, said in October they wanted to keep the scheme simple.

"You want to keep it as simple as you can. Any conditionality, you want to be simple. You don't want it to end up inhibiting the scheme [from] being used…

"If you design something that's too complicated, [and it] becomes too much of a compliance exercise, it just puts banks off from using it. I think that would be something that we need to balance carefully when we do the design."

Cameron Bagrie.
Cameron Bagrie. Photo credit: The AM Show

He said there have been "mixed" results overseas when funding for lending schemes have been narrowly targeted.

Bagrie said the Reserve Bank has "obviously [been] stoking the property market" this year, regardless of the consequence - soaring house prices, which research has found to be the biggest driver of inequality in New Zealand. 

"That's one of the channels monetary policy works through... you get asset prices up and people are more encouraged to spend out there."