A more severe economic downturn will weigh on wellbeing, but will also lead to a deterioration in banks’ non-mortgage assets. For example, in Ireland private consumption fell sharply over the GFC with retail sales declining by almost 20 percent annually by 2009, which led to widespread defaults on business loans. By 2013, more than 40 percent of SME loans in Ireland were in default.
Our modelling suggests that the LVR policy has slowed the growth in household debt in New Zealand. A lower level of household debt and more durable house prices should insulate domestic demand, and the wider economy, against financial instability.