Henare Tau: Questions for Oral Answer — Questions to MinistersText is incorporated into the Bound VolumeHenare Tau: Questions for Oral Answer — Questions to Ministers[Sitting date: 12 June 2013. Volume:691;Page:11042. Text is incorporated into the Bound Volume.]3.Hon TAU HENARE (National)to theMinister of Finance: What recent steps has the Government taken to help protect the economy and financial system from damaging boom and bust credit cycles?Hon BILL ENGLISH (Minister of Finance):Last month I signed a memorandum of understanding with the Reserve Bank Governor on measures aimed at providing extra security to the financial system. Banks already have to meet increased capital and liquidity requirements that make them safer. The memorandum provides four new measures for the Reserve Bank to apply if necessary. These measures allow the Reserve Bank to require registered banks to hold additional capital on their balance sheets as a buffer during an economy-wide credit boom; secondly to hold additional capital against loans in specific sectors if risks emerge; thirdly to adjust their funding ratios to use more stable sources of funding to avoid short-term funding shortages; and finally to apply quantitative restrictions on the share of high loan-to-value ratio loans in the housing sector.Hon Tau Henare: How will these extra capital and liquidity tools help to promote stability in the financial system?Hon BILL ENGLISH: Well it is important to have stability in the financial system because we have seen the effect on economies around the developed world when financial systems become unstable. These tools will not necessarily be the answer to all problems but they will certainly help at the margins. They will increase the resilience of the financial system during periods of rapid credit growth by requiring banks to make themselves safer and stronger in case excessive growth in credit and asset prices stops and those prices fall. Without these tools banks could be put at risk.Hon Tau Henare: Why is it important that the Government guards against excessive credit and house price cycles?Hon BILL ENGLISH: One reason is to avoid recessions of the nature that New Zealand had. We had an excessive credit and house price cycle through the 2000s which meant that by 2008 before the global financial crisis New Zealand was in recession. We have seen also around the world that where house prices rise rapidly on the back of fast credit growth this creates problems for interest rates and exchange rates on the way up through the cycle. Then when the house prices crash as they inevitably do that can create real problems for homeowners and for the wider economy.Hon David Parker: Has the Minister seen the report from the OECD this month that warns that house prices in New Zealand are overheating and that a capital gains tax as used in almost every other OECD country is very important to help deal with this imbalance?Hon BILL ENGLISH: I have seen that advice and do not necessarily agree with it. Economies that are struggling either through low growth or because of excessive housing prices generally had capital gains taxes and it has not prevented the kind of devastation that housing bubbles cause when they burst. We believe that a more direct approach is to dampen if not prevent the capital gain in the first place and that is by ensuring that there is more flexibility in the supply of housing so that when there are more people willing to pay more for houses more houses get built more quickly.Hon Tau Henare: Can the Minister tell us what are some of the risks for homeowners in the current environment of low interest rates and rising house prices?Hon BILL ENGLISH: I am sure banks are advising homeowners to ensure that they could afford to service substantial loans if or when interest rates rise. Whether they do is a matter for the Reserve Bank Governor. For instance some banks are currently offering shorter-term fixed mortgages at record low interest rates below 5 percent. Floating rate mortgages are currently at around 50-year lows. Homeowners are being advised by banks that they should not believe that this is a permanent state of affairs. It is possible that at some stage in the next few years interest rates will start rising. If house prices continue to rise very rapidly it is possible that interest rates could follow the track of the last housing cycle where first mortgage rates reached 10 percent at their peak.