How has the LVR restriction affected the housing market: a counterfactual analysis
Download Document| Date Published | 2014 |
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| Primary Author | Gael Price |
| Other Authors | |
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| Country | New Zealand |
Abstract
The Reserve Bank introduced a loan-to-value ratio (LVR) ‘speed limit’ for housing loans in October 2013. It is not easy to estimate the real-world effects of a policy change. Since the LVR restriction was introduced, house sales have fallen, house price inflation has declined, and credit growth has stabilised. But other factors also affect house prices and credit growth (over this period, for example, net immigration has increased and economic activity indicators have been strong), and determining how much of the housing market changes can be attributed to LVR restrictions requires some analytical framework.To disentangle the effects of the LVR restriction from other influences that have affected the housing market, this paper uses a counterfactual scenario – a description of what could have happened in the absence of the LVR restriction. We estimate the usual relationships between housing market variables over history, and then use those relationships to predict the likely ‘normal’ behaviour of the housing market, starting from just before the LVR policy was announced. The forecast also needs to take account of developments in the broader economy. Hence, the forecast is conditioned on other variables that are important for the housing market – migration, economic activity, and interest rates. Actual housing market activity, house price inflation, and household credit growth have fallen below the estimated counterfactual scenario since the LVR restriction was introduced. House price inflation is 3.3 percentage points lower than the model suggests it could have been, and household credit growth is 0.9 percentage points lower (as at March 2014). This result is most likely to have occurred because of the imposition of the LVR restriction. There has been quite a rapid reaction in the housing market during the initial period of transition. It will be important to continue assessing the effects of the policy as the market adjusts.To the extent that the model captures well the behaviour of the housing market, the results suggest that the LVR restriction has reduced house price inflation and housing-related credit growth. The framework used here relies on the assumption that the LVR restrictions have been the main source of developments within the housing market itself (as distinct from external influences such as migration or economic activity) since September 2013. This assumption will become increasingly unlikely to hold over time. To assess the effectiveness of the LVR restrictions beyond the initial adjustment period, other techniques will be needed.