One of the major downsides of the 2008 financial crisis has been the emergence of so called "macro-prudential" regulation.

This sort of regulation, hoping to limit systemic risk in the banking sector, is fashionable but signals a return to the 1970s mentality of economic fine-tuning, albeit with different tools. It also adds to moral hazard as the government effectively designs and then approves levels of bank probity. Of particular concern are reports on one of the macro-prudential tools that the Reserve Bank seems likely to employ in the near future: limiting the loan-to-value ratio (LVR) for bank mortgages.

As has been widely reported, the Reserve Bank may compel commercial banks to lift the deposit needed for a new home to 20% of the total value of the loan. This means that for a $400,000 house, an $80,000 down payment would be required.

The obvious trigger behind the introduction of an LW ratio is the perceived price bubble in Auckland's real estate market. At least in part, this policy lever is considered an alternative to missing interest rates at a time when inflation is low and the rest of the economy is far from overheating.

There also seems to be a paternalistic element: If there is a bubble, and, if it pops with a big bang, many people could hold negative equity in their homes, creating a large number of poorer citizens.

For potential first homebuyers, the LVR ratio is an unhelpful policy. It effectively penalises first-time home buyers, low on equity to which a bank may have otherwise provided a loan.

This policy will likely have a short-term effect on demand and the housing market may cool off a little. However, it will have mixed results if the results of similar policies abroad are anything to go by.

Looking at some overseas examples proves instructive. The Wall Street Journal recently compared some of the different jurisdictions and provided some international comparisons.

Housing is seen as a key battleground in the macro-prudential war:  in many countries a housing bubble (or more accurately, its collapse) was, rightly or wrongly, identified as one of the causes of the global financial crisis.

The subprime real estate market in the US is the obvious example. Because of such bubbles, whose existence is difficult to prove until they burst, mandated loan-to-value ratios are in vogue. In theory, they stop imprudent lending, impetuous borrowing and help to tamp down a particular asset class. Central banks all around the world are doing it.

In Israel, a 30% LVR has been introduced as a down payment for a house or 25% for a first-time buyer.

In South Korea, so-called "speculative" areas such as the exclusive suburb of Gangnam have been hit with further restrictions. A 50% down payment is required and proof that mortgage payments will not exceed 40% of income.

In South Korea, while these decisions have had the effect of taking the heat out of the housing market, it has perhaps cooled too much: according to the WSJ, very little property is moving at all and prices fell 5% last year.

In Israel's case, someone buying a house must put 30% down, while a person buying for investment purposes needs to put down a staggering 50%. However, in contrast to Gangnam, this has had little effect on the housing market, with prices rising 3.2% in the last quarter, or 13.8% annually. The macro goals remain unachieved but with disruption to capital flows.

And it's not only housing. In Indonesia there was a ban put on zero down payment loans for motorcycles introducing 25% deposits. Of course, the number of motorcycles sold fell 12% to about seven million in a year.

While the effects of these policies are no doubt market specific, they are a recipe for unintended consequences. As the IMF's chief economist Olivier Blanchard has said, "Macro-prudential tools are new and little is known about how effective they can be."

In fact, it looks more like old-fashioned economic fine tuning, whereby governments, via a group of enlightened technocrats (in this case central bankers), decide where capital should flow.

Such restrictions also have the unfortunate side effect of the government defining levels of bank probity. The view seems to be that banks are incapable of deciding what constitutes risk (of which there is little evidence in New Zealand).

Or, the Reserve Bank thinks banks are responsible but that lending constitutes some sort of unreasonable risk to the economy in general that hasn't fallen on individual banks in particular. The thinking behind it is decidedly woolly.

But the real problem with the policy is that it treats symptoms rather than causes by artificially restricting demand, rather than curing long running under-supply. An LVR does nothing to increase supply. Potential owners are punished today for the sins of central government and local councils, whose regulatory creep has suppressed housing supply for decades.

New Zealand has a honing supply side problem, primarily in Auckland (although it certainly holds elsewhere). There is little evidence of a credit problem; on the contrary, credit growth has slowed markedly in recent months.

In fact, this "macro-prudential tool" could have the imprudent effect of stalling new housing supply in the short term and thereby increasing prices in the long run. The policy might actually create enough uncertainty to limit downstream supply by discouraging investment. And of course, it is a policy that actively advantages those with houses and equity over those with no house and little equity.

This is without mentioning some of the unintended consequences: informal private lending, a rise in high interest lending and an increase in nonbank lending. In short, there is little to commend this policy and many reasons to oppose it.