New Zealand's
Experience with
Macroprudential
Policy
Panel remarks delivered to the Central Bank of Ireland
On 27 April 2022
Delivered by Christian Hawkesby, Deputy Governor
and General Manager Financial Stability
Prepared with Graeme Cokayne
Introduction
Kia ora koutou katoa and thank you for inviting me to be a part of this panel on an important
topic. For me, it is a great opportunity to listen and learn from the experiences of the other
the panel members with macroprudential policy in their countries. In return, I was planning to
share our experience in New Zealand. In particular:
 the issues that motivated the introduction of macroprudential tools;

the actions we have taken to adjust their settings through time;
 the lessons we have learned from their use along the way; and
 the next steps we are planning to take in this space.
By way of background, it is useful to first outline where macroprudential policy sits within the
role of the Reserve Bank of New Zealand - Te Pūtea Matua (RBNZ).
The purpose of the RBNZ is set out in our Statement of Intent for 2021-2024 and is described
by the Māori phrase Toitū te Ōhanga, toitū te Oranga. This is usually translated as 'enabling
the prosperity and wellbeing of all New Zealanders'. We do this by promoting a sound and
dynamic monetary and financial system.
Within this overall statement of purpose we have four key policy objectives set out in our
enabling legislation. The first is monetary policy, where we target low and stable inflation,
and support maximum sustainable employment. The second objective is promoting a sound
and efficient financial system. The third and fourth policy objectives are meeting the public's
cash needs and overseeing an effective payments system. By international comparison, we
are a full-service central bank (Table 1).
Table 1: Central Bank Functions and Responsibilities
Country Monetary Liquidity FX Leader Prudential Bank &
Policy Management Intervention of Last Policy Insurance
Resort Supervision
New Zealand ⚫ ⚫ ⚫ ⚫ ⚫ ⚫
Australia ⚫ ⚫ ⚫ ⚫ ⚫ ⚫
Japan ⚫ ⚫ ⚫ ⚫ ⚫ ⚫
⚫ ⚫ ⚫ ⚫ ⚫ ⚫
South Korea
Norway ⚫ ⚫ ⚫ ⚫ ⚫ ⚫
United Kingdom ⚫ ⚫ ⚫ ⚫ ⚫ ⚫
Eurozone ⚫ ⚫ ⚫ ⚫ ⚫ ⚫
United States ⚫ ⚫ ⚫ ⚫ ⚫ ⚫
Central bank functions and responsibilities key:
⚫ Full ⚫ Shared or partial ⚫ None or minor
Source: Adapted from Aldridge and Wood (2014), Monetary policy decision-making and accountability structures: some
crosscountry comparisons. Reserve Bank Bulletin, 77(1)
To achieve these policy objectives, we have different tools that broadly fall into three
categories.
First are monetary policy tools, which in New Zealand are the Official Cash Rate (OCR) and
other instruments across our balance sheet. These are largely aimed at managing demand in
the economy through influencing interest rates across the yield curve, and ultimately for
households and businesses.
Secondly, we have micro-prudential tools such as capital requirements, liquidity
requirements, and regulations on governance and disclosure. These are mainly aimed at
promoting the stability of individual financial institutions, and thereby supporting the
resilience of the financial system. This is supplemented by prudential supervision and
enforcement to ensure that banks are operating consistently with these prudential settings.
Finally, we have macroprudential tools, which are designed to address wider systemic risks to
the financial system as a whole that may not be adequately managed through
microprudential regulation and supervision. In New Zealand, this has primarily involved
loan-tovalue ratio (LVR) restrictions in the mortgage market (which in Ireland would be called LTV
restrictions). It has also involved sectoral capital requirements and - in future - the
countercyclical capital buffer.
The Motivation for Macroprudential Tools
In New Zealand, we first introduced macroprudential tools back in 2013.
The motivation at the time was that we felt that the low level of interest rates required to
achieve our monetary policy mandate was creating risks to financial stability that we needed
to manage. Introducing macroprudential tools, therefore, gave us an "extra degree of
freedom," especially in an environment where the financial cycle and business cycle were out
of sync.
In particular, in 2013 our official interest rate was still near a record low level at the time, as
consumer price inflation pressures were weak in the aftermath of the Global Financial Crisis
(GFC). However, with easy monetary conditions, house prices rose sharply, especially in our
largest city, Auckland (Figure 1). In this period, house prices in Auckland reached nine times
the average income.
We felt we needed extra tools to manage this growth, especially as we had observed from
other countries through the GFC how unsustainable asset prices could have material
consequences for the stability of the financial system down the track. The use of
macroprudential tools was also gaining acceptance around the world at the time, though
actual experience was somewhat limited.
In May 2013 we entered into a Memorandum of Understanding with the Minister of Finance,
under which the RBNZ initiates any macroprudential policy action, but only after consultation
with the Treasury and Minister1. In practical terms, this meant that adjustments to
macroprudential settings could be undertaken by the RBNZ but major alterations (such as the
introduction of new tools) requires consultation.
Initially, the macroprudential tools that we introduced were LVR restrictions on residential
mortgages and core funding ratios for banks. While we introduced core funding ratios, we
have only rarely adjusted them, so I will focus here largely on our experience of LVRs.
Figure 1: House Price Growth in New Zealand
The first shaded area is the tightening phase, the second is the easing phase, and the final is the
COVID19 phase.
Our Experience of Macro Prudential Tools
Our experience of managing macro prudential tools since 2013 has broadly involved four
phases. All decisions since in 2013 can be found in the Annex.
Initial Settings (2013-2015)
When we first introduced LVR restrictions, our main concerns were that rising house prices,
particularly in Auckland, but also Christchurch, would lead to vulnerabilities in the financial
system.
Our analysis suggested that the main causes of the rising house prices were housing supply
shortages and easy credit. We saw that banks were competing strongly for borrowers with
low deposits and so by tightening lending criteria we felt that we could slow the rapid
expansion of credit that was fuelling the house price growth. We were actively seeking to
influence house prices.
The RBNZ governor at the time stated that "[t]he LVR restrictions are designed to help slow
the rate of housing-related credit growth and house price inflation, thereby reducing the
risk of a substantial downward correction in house prices that would damage the financial
sector and the broader economy... In the current situation, where escalating house prices
are
presenting a threat to financial stability but not yet to general inflation, macroprudential
policy offers the most appropriate response."2
The initial settings of the LVR restrictions in October 2013 were that banks could not issue
more than 10 per cent of loans to borrowers looking to borrow more than 80 per cent of the
value of the house. This so-called speed limit of 10 percent allowed banks to continue to
allocate credit to some borrowers with LVRs above 80 per cent as they saw appropriate,
mitigating to some extent concerns about what restrictions meant for allocative efficiency.
While the initial impetus for imposing LVRs was primarily due to concerns about the housing
market in Auckland, we felt that imposing LVR restrictions solely on Auckland could create
issues around their administration and the possibility of shifting housing pressures outside of
wherever the boundary was drawn. Therefore, we initially put in place national rather than
Auckland-specific restrictions.
Tightening Phase (2015-2016)
Nonetheless, by November 2015, we did institute a tighter policy for Auckland compared
with the rest of the country. At the same time, in Auckland, we imposed different regulations
for owner-occupiers and investors (which in Ireland would be called 'buy-to-let buyers').
The objectives of the amended policy were to "...more directly target investor activity in the
Auckland region, where house prices relative to incomes and rent are far more elevated than
elsewhere in New Zealand. The objective of this policy is to promote financial stability by
reducing the rate of increase in Auckland house prices, and to improve the resilience of the
banking system to a potential downturn in the Auckland housing market"3.
The split between owner-occupiers and investors was then extended to the rest of the
country in October 2016, and has been maintained since, while the regional differentiation
has been removed. Our policy has been to have tighter regulations on investors than
owneroccupiers reflecting the greater risk from that type of borrowing.4
Easing Phase (2017-2019)
By late 2017, the general economic outlook internationally was fairly stable and the
nearterm financial stability risks appeared to be easing so it was seen as a good time to ease
some of the restrictions on LVRs in order to remove some of the potential for inefficiency in
the mortgage market.5
At the time we said "[d]omestically, LVR policies have been in place since 2013 to address
financial stability risks arising from rapid house price inflation and increasing household debt.
These policies have helped improve banking system resilience by substantially reducing the
share of high-LVR loans. Over the past six months, pressures in the housing market have
continued to moderate due to the tightening of LVR restrictions in October 2016, a more
general firming of bank lending standards and an increase in mortgage interest rates in early
2017"6.
COVID-19 Period (2020-2021)
Finally, in the face of the extreme uncertainty posed by the start of the COVID-19 pandemic
in early 2020, we both loosened monetary policy significantly and removed restrictions on
LVRs, in order to support the economy and financial system through this unprecedented
period.
A key reason for removing the LVR restrictions was to eliminate a potential barrier to putting
in place a mortgage deferral scheme implemented in response to the pandemic, while a
general concern for supporting credit flow provided an additional impetus. We decided that
the policy that we would least regret through this period was to remove restrictions and have
to put them back on later; rather than the alternative of keeping conditions too tight and
exacerbating a contraction in the financial system and economy.
As the Deputy Governor at the time said, "[g]iven the current uncertainty around the
economic outlook, the Reserve Bank considers that it is unlikely that banks will weaken
lending standards to high risk borrowers. The more likely risk is that banks are overly cautious
with lending to credit-worthy borrowers"7.
As it turned out, the New Zealand economy was much more resilient to the impact of
COVID19 than had been feared. Economic activity bounced back relatively quickly, as did house
prices supported by resilient demand, low interest rates and an historic lack of supply.8
Having announced in April 2020 that we would be removing LVR restrictions for a year, by
December 2020 we produced a consultation document foreshadowing an earlier
reintroduction of LVRs. LVR restrictions were reintroduced in March 2021 and tightened
further for investors in May 2021, and then owner-occupiers in November 2021.
Lessons Learnt from Our Experience
So that is a brief history of our experience of using macro-prudential tools over a period of a
little less than a decade.
A key general point that I would like to leave you with is that making decisions about
macroprudential settings has not been straightforward or easy in any sense.
We have reviewed our LVR settings on average every six months over this period. Compared
to setting monetary policy every six weeks for the past 30 years, macroprudential policy in
New Zealand is still in its infancy; we are still learning; and still finding our rhythm of
following a consistent, repeatable process backed by clear and transparent communication.
However, there are three high-level lessons that I do think are worth sharing.
Social Licence
To earn our social licence to operate, policymakers need to ensure that the public
understands and supports why our policy tools are being used. This has been an ongoing
work in progress.
Unlike other prudential policies like capital and liquidity regulation of financial institutions,
LVR restrictions are highly visible to the public and directly impact the ability of households
to access credit. In the case of macroprudential tools, for example, the argument is often
made that borrower-based restrictions affect first-time buyers disproportionately, and can
keep people out of the housing market. For the policies to be accepted, therefore, a high
degree of public transparency and accountability is needed.
Equally, for banks responsible for implementing macroprudential policies, they need to
buyin to the broader benefits to financial stability, and the importance of investing in their
systems and compliance capability.
From the start of our use of macroprudential policy tools, social acceptance has been
important for us. This included our Memorandum of Understanding with the Minister of
Finance, which ensured that we were in agreement on what tools we could use and how we
could use them.
Our dialogue with the government has continued, including the direction that we received in
February 2021 from the Ministry of Finance under section 68B of the Reserve Bank Act
indicating that when setting financial policies we have regard to the government's policy "to
support more sustainable house prices, including by dampening investor demand for existing
housing stock which would improve affordability for first-home buyers".9
Further, at each stage of our macroprudential policy settings, any major changes have
involved public consultation where we considered the views of industry as well as the public
more generally.
Managing House Prices vs Building Resilience
When we first introduced LVR restrictions, we thought that they should be used as a
temporary measure when the housing market was overheated that could then be eased or
removed as the housing market cooled.
What we have come to understand is that the effect of LVR restrictions on house price cycles
are quite modest. Tightening LVRs beyond a certain point can inhibit house price growth, but
once loosened they have a fairly minimal effect.10 By contrast, monetary policy, through
changing the level of interest rates for all borrowers, has a far greater effect on house prices
than LVR restrictions. Even then, there any many other supply-side factors that have a
considerable influence house prices, outside the control of the central bank.
Therefore, rather than a tool to actively manage asset prices, we have found the major
benefit from LVR restrictions to be their more permanent role of building resilience into the
financial system, better preparing the economy and financial systems to the potential fallout
from a sharp reversal in the housing market.
Specifically, LVR restrictions reduce the chance of borrowers going into negative equity
following a large correction in the house prices, and therefore also reduce the loss given
default for banks if borrowers fail to maintain their mortgage payments.
As such, we find that it is the effect of LVR policy on the stock of mortgages that matters
more than its effect on the flow of new mortgages. In New Zealand, the stock of high-LVR
lending has declined markedly since we first imposed LVR restrictions and is currently near
historic lows (Figure 2). It has declined from nearly 17% of all lending in 2014 to around 7% at
the end of 2021.
The system-wide loss given default has therefore declined leading to a more stable, resilient
financial system. This has been the main benefit from having macroprudential policy options.
Figure 2: The Stock of High LVR Mortgages in New Zealand
The Need for a Complete Set of Tools
While it has been beneficial for us to add macroprudential tools to our policy suite, it has also
become apparent that we need a full set of tools to better manage risks.
Debt to income has been increasing in New Zealand over the past 35 years, with only a
modest dip following the GFC (Figure 3). Therefore, households are still vulnerable to falls in
income affecting their ability to service their debt.
As mentioned earlier, LVR restrictions help us manage the loss given default in a period of
widespread default on mortgage lending. Including a debt to income measure in our toolkit
would help with reducing the probability of default. Therefore, these two policy tools deal
with different sources of risk: LVRs with the risk to banks from a fall in house prices, and DTIs
with the risk to households from a fall in income.
We see reducing the probability of default and loss given default as two complementary
policies in creating a more resilient financial system. As with LVR restrictions, we see DTI
measures as policies aimed at reducing through-the-cycle risks. And indeed DTIs might well
be better at managing such risks, as income tends to vary much less through the financial
cycle than the value of houses.
Figure 3: Household debt-to-income ratios
Among other policy measures,11 we have also looked at implementing floors or buffers on
banks' test interest rates, to ensure that borrower households are better equipped to deal
with fluctuations in interest rates and, hence, less likely to default on their mortgages.
With all of these tools in place, LVRs, DTIs, interest rate floors, and enhanced prudential
buffers, we would have a number of different ways of enhancing the resilience of the New
Zealand financial system to deal with different challenges as they appear.
Next Steps
Looking ahead, there are two main next steps on our macroprudential agenda.
Consulting on Additional Tools to Complete the Suite
We are currently consulting with banks and the general public on adding debt-to-income
(DTI) tools to our framework. Some banks have expressed their preference for a floor on test
interest rates instead of a DTI. They have argued that an interest rate floor would be much
easier for them to administer and it could, in the end, achieve similar results.
While we have taken on their argument, a DTI continues to be our preferred option. We feel
that a DTI produces a better control on the probability of default as a complement to the
reduction in loss given default provided by existing LVR restrictions.
By contrast, test interest rates are only one input into banks' serviceability assessments, and
there is a risk that a test rate floor could be offset by adjustments to other elements of banks'
calculations. However, an interim test rate floor could be put in place in the short term if
necessary to address financial stability risks.
We are currently looking for banks to be operationally ready to introduce a debt servicing
tool by mid-2023, if they are required12.
Enhancing our Framework and Communications
For monetary policy, so-called 'neutral interest rates' provide a sense for whether the current
settings for interest rates are expansionary or contractionary.
In a world where macroprudential tools have turned out to be a more permanent feature of
the landscape than we initially expected, we think that it is important to consider and explain
the neutral macroprudential settings.
That way we will not only be able to express whether we think current macroprudential
settings are expansionary or contractionary at any time, but also provide a clearer path ahead
into the long-term to their neutral settings.
Again, to use the analogy with monetary policy, much like how we publish a projection for
the Official Cash Rate (OCR), we should aspire to be able to publish a projection of our
macroprudential settings, and to explain how these will assist us achieve our mandate for a
stable and efficient financial system.
With potentially more macroprudential tools available as part of a full suite, we will also need
to consider and explain how they combine in total to a neutral long-term setting to support
financial stability through the cycle.
All of these considerations are part of the building blocks we need to put macroprudential
policy on an equal analytical footing with monetary policy, and to find the rhythm of
following a consistent, repeatable process backed by clear and transparent communication.
Conclusion
So to sum up the New Zealand experience, we have evolved and developed our thinking on
macroprudential policy tools.
Our experience has informed us that macroprudential tools are an important part of
delivering on our responsibility for the stability of the financial system as a whole, alongside
other prudential settings.
We have shifted our LVR restrictions through time, applying different setting for regions and
types of borrowers, and adjusted our settings in response to the changing threats to financial
stability.
Over time we have evolved our thinking from considering LVR restrictions on mortgage
lending to be a temporary tool for managing ups and downs in the financial cycle to seeing
them to be a more permanent device to maintain the resilience of the financial system.
We have also come to see that it is important to have a fuller suite of macroprudential tools,
which help manage both the risks to the financial system from a fall in house prices and the
risks to households being unable to service their debt. Aligning with our Memorandum of
Understanding with the Minister of Finance on macroprudential policy, in designing debt
serviceability restrictions we will have regard to avoiding negative impacts, as much as
possible, on first-home buyers.
We have more work ahead of us to continually enhance our frameworks, processes and
communication, focused on our ultimate purpose of contributing to the prosperity and
wellbeing of the New Zealand people.
Thank you very much for asking me to speak here today.
Annex 1.
Table 2: History of LVR Settings
All Owner AKL Owner Investor AKL
NonAKL Occupier Occupier Investor
Speed Limit 10 10
2013
October
Threshold 80 80
Speed Limit 15 10 5
2015
November
Threshold 80 80 70
Speed Limit 10 5
2016
October
Threshold 80 60
Speed Limit 15 5
2018
January
Threshold 80 65
Speed Limit 20 5
2019
January
Threshold 80 70
Speed Limit No No
restriction restriction
2020 April
Threshold No No
restriction restriction
Speed Limit 20 5
2021 March
Threshold 80 70
Speed Limit 20 5
2021 May
Threshold 80 60
Speed Limit 10 5
2021
November
Threshold 80 60
Red = Tightening, Yellow = Steady, Green = Easing