Loan-to-value ratio restrictions

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(US and European readers, take note that here in NZ we think we have escaped the housing crash and are somehow better than you, so read below with sense of déjàvu if you must)

So what is my take on the new lending restriction now in-place in New Zealand since October 1st 2013?

The likely outcome: 
  1. House prices will go down (if the demand is not soaked up by overseas investors)
  2. Government accounts about to take a U-turn down – along with the economy
“But wait,” you ask, “aren’t house prices hitting records highs right now, the government accounts are looking better and the transport sector is up?” Well, yes they are, but at least in my mind all these things are up because borrowing’s up, and with borrowing likely to head downward with this reserve bank move, things will suddenly turn negative with them. 

As a country we are in trade deficit (and more importantly current account deficit) year after year. This fact means we must, as a country borrow money to pay interest on our debt, plus the deficit of our current account year after year.... and a little more for those special extras in life!

So if borrowing drops, less money is around to pay the interest on our ever increasing debt.  So where does the money come from to pay for that? Asset sales and spending cut backs, which in turn mean less tax-take for the Government.

How soon will this happen? I think in a few months the lagging numbers will start to show.

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