Reserve Bank of New Zealand Discussion Paper 2018/05: Fang Yao and coauthors on house prices and LVR restrictions in New
Zealand
Non-technical summary
This paper contributes to the international policy debate on the effect of macro-prudential policy on housing-market
dynamics. We use detailed New Zealand housing market data to evaluate the effect of loan-to-value ratio (LVR)
restrictions on house prices. The main challenge in identifying these effects is that housing markets are affected by a
range factors over and above LVR policy. For example, New Zealand experienced a raft of policy changes and macroeconomic
shocks during the periods in which LVR policy changes were implemented. Many of these shocks and policies are likely to
have affected the housing market. For example, when the first LVR policy was implemented, retail interest rates were
rising alongside an increasing expectation for monetary policy tightening, while the New Zealand Treasury was adjusting
housing-related policies at the time of the second LVR policy. This paper uses the exemption for new builds from the LVR
restrictions as a natural experiment to identify the effect of LVR policy.
We find that, over the one year window around the new home exemption, the first LVR policy (referred to as ‘LVR 1’) had
a 3 percent moderating effect on house prices, and this moderating effect is broadly similar across both Auckland and
the rest of New Zealand. Interestingly, our estimates show that LVR 2 (which tightened restrictions on Auckland
properties and loosened restrictions elsewhere) did not significantly stop Auckland house prices from rising. By
contrast, house prices in the rest of New Zealand (RONZ) increased by 3 percent due to the relative loosening of the LVR
restriction. In LVR 3, the RBNZ further tightened the LVR restrictions on property investors nationwide. The moderating
effect of LVR 3 was clearly seen in Auckland with a 2.7 percent reduction in house prices. This LVR 3 effect is both
statistically and economically significant, as during the same period the average house price increased by 5.8 percent.
Overall, we estimate that the LVR policies reduced house price pressures by almost 50 percent. However, the effect of
LVR policy is highly non-linear. When it becomes binding, LVR policy can be very effective in curbing housing prices.