By Bernard Hickey
Two banking sources have told me the Reserve Bank advised them informally on Friday that it would set a 'speed limit' of 12% for growth of high LVR (loan to value ratio) mortgages and that a public announcement was due within days.
This would mean a maximum of 12% of total new mortgages would allowed to be in the 80% + LVR category, significantly below the 30% share of growth seen over the last year for such low deposit mortgages.
Mortgage lending grew by a total of NZ$9.2 billion or 5.3% in the year to May to NZ$182.661 billion, Reserve Bank figures. The bank has estimated about 30% or NZ$2.76 billion of that growth in the last year was in high LVR categories above 80%. It previously signaled in its June 4 consultation paper that it could, for example, impose a 'speed limit' of 10% on the proportion of growth coming from the high LVR category. Consultation ended last Wednesday.
If the speed limit was imposed at 12%, lending growth would slow sharply. If it had been imposed a year ago and banks went right up to the edge of the limit and still lent a total extra NZ$9.2 blllion, then the high LVR lending would have been NZ$1.66 billion lower at NZ$1.1 billion. Bankers said in reality the banks would be reluctant to go too hard up against the 12% limit, given it would be a condition of their banking license, suggesting banks would instead in practice opt for a lower number around 10%.
The sources said an announcement was expected within days and appeared not to have any exemptions for first home buyers, as had been suggested by Prime Minister John Key. The bank has previously signalled it could impose the speed limit with as little as two weeks notice and that it was opposed to such exemptions for particularly classes of buyers.
The banking sources said banks would struggle to deal with such a short time frame, given there were large backlogs of pre-approved high LVR mortgages.
Reserve Bank spokesman Angus Barclay declined to comment on whether the Reserve Bank had made a decision or, if it had, when it might make an announcement.
Finance Minister Bill English's spokesman Craig Howie said nothing had changed since English told reporters last week the government was still consulting with the Reserve Bank over the implementation of the banks' 'macro-prudential' tools, including the potential for speed limits. Howie said the Reserve Bank Governor had always had the "independent power under the 1989 Reserve Bank Act" to make such decisions, although the Minister did not expect any announcement "in the next few days."
If the speed limit is imposed without exemptions, this would be a knock back for Key, who had pushed hard for exemptions for first home buyers. Deputy Governor Grant Spencer said in this June 27 speech the bank was opposed to such exemptions.
Labour reacts
Labour Housing spokesman Phil Twyford said Labour supported the use of such macro-prudential tools for economic reasons, but would exempt first home buyers while the government built affordable homes and applied a Capital Gains Tax on rental properties and second homes.
"To do this now is a huge kick in the teeth for first home buyers," Twyford told Interest.co.nz.
"It advantages property investors and locks out first home buyers," he said.
“National’s policy will mostly hurt low to middle income earners in provincial cities and south and west Auckland. Wealthy people buying in the hot parts of the market in Auckland will be much less affected."
"It’s the lack of affordable homes. House prices are increasing because therein the market and very few new homes are being built in an affordable price range,” Parker said
(Updated with Twyford and Parker comments; also updated comments from English's office)
28 Comments
This has been attempted in other countries recently and did zero to slow the market.
I believe it was also implemented in NZ previously - which saw the lauch of finance companies to fill the debt gap. Old people may remember?
Unintended consequences.....
Lets see.
http://www.israelnationalnews.com/News/News.aspx/161475
By all accounts this failed.
Didn't work in Israel.
But has worked in South Korea and Canada
More detail here from WSJ's David Wessel in WSJ
http://finance.yahoo.com/news/central-bankers-hone-tools-pop-033300289…
cheers
Bernard
SK, I am one of them Old People and I remember it well - we called these provisions Prudential Standards and they were self imposed by lenders who then had the good sense to be cautious and trustworthy when it came to business risks. Now all that has passed away and government (in one form or another) is expected to save both silly lenders and borrowers together! These "LVR's" may work to protect the banks from themselves but won't have much impact on the house price inflation as 2nd and 3rd ranked lenders will step forward to fill the gap.
And, again, I say that only significant interest rate rises will really stop runaway house price inflation.
Ergophobia
But there is a huge risk to 2nd and 3rd mortgagees when there is a bubble. I remember it well; they lose out when property collapses. In the 1930s existing 2nd mortgages were just abolished. Also the first mortgagee has to agree to any subsequent mortgage. They are holding the title. The "significant interest rate rises" did not stop runaway house price inflation in the 1980s.
Okay , this is a start , but we need to understand its not a silver bullet solution because its very tricky to police this type of thing
1) There must be no price boosting to cover the deposit , in other words a $500k property cannot be sold with a clause in the S&P agreement saying the seller has ' received' a $60 (12%) deposit which is 'non refunbdable " OR the Real Estate agent boosts the price by 12% and the seller either" writes it off" or " lends" it back in perpetuity at zero interest with no registered security
2) Many migrant buyers dont qualify for mortgages, so they are either cash buyers or use syndicated funds to finance a property . This is not something the Treasury or Government is able to stop , except with the new money laundering legislation which requires the sources of funds to be identified
Best news ever.
It's about time rents went up, and this will do it very nicely, thank you very much,
The poor will be forced to stay renting forever, being never able to save up enough.
And with higher rents their ability to get any sort of deposit together will be reduced even further.
Heaven on earth for the investors and countless thanks to the academics and bureaucrats
who dream up these ideas with no thought of the consequences.
OK - so only 12% of all new loans will be able to be at 80% LVR or higher and as discussed banks will err on the side of caution and most likely only 10% of all new loans will be at 80% LVR or higher.
So who will this impact on:
Only the first home buyers who have less than 20% deposit.
What else will be the likely outcome:
Rents will increase as those with only 5% to 10% deposit will find it impossible to save the balance and will be renting for much longer.
Who will not be impacted:
Migrants with all cash or more than 20% deposit
Wealthy investors who will still be able to purchase multiple properties 100% financed due to offering security over their entire portfolio including the family home which may have previously had no associated debt against it.
First home buyers with wealthy parents who may purchase the home then onsell at a discount to the kids once the value increases further.
Setting up a classic scenario where the rich get richer and the poor stay that way.
As a Mortgage Broker in a provincial area of the North Island it has been great to see young couples, primarily, excited at the propsect of owning their own homes. These young, and not so young couples, have been in Kiwisaver since its inception. They have beeen using their Kiwisaver funds and Housing NZ First Home Buyers Subsidies to purchase their first homes.
Yes, they are high LVR bracket, but have generally had excellent joint gross incomes so servicing has not been an issue.
However, the "Speed Limit" will likely "kill off " those who had been excited at the prospect of owning their own homes. Thanks for that Mr Wheeler.
You have a heavily vested interest and I don't think you understand why this financial lever has been used.
First home-buyers >90% LVR are the ones MOST at risk of a housing correction..... Wheeler was in the US when many high LVR first-home buyers ended up under water in 2009/10- it appears he's not letting emotion get in the way of protection.
Banks will simply be selective of who gets credit ... if your clients have such excellent incomes, clean credit history and solid savings as you say they do, they'll still get their loans.
It will be people who come to you having been declined by banks previously that will need to build their deposits. And that's a good thing
There will always be some who cannot afford to buy and at such high LVRs too many is a risk to stability due to leverage in inevitable downturn. Now it means banks will have to be picky....if they are good no problem I suspect.
Of course you are a vested interest earning a commission, so who are you really thinking of?
regards
Mr Wheeler is not concerned about borrowers, or at least he shouldn't be. Their welfare is outside his mandate and in the political sphere. His only concern is stability of the banking system and he must feel there is a risk of a housing shock which will threaten a bank or two unless they improve the security for their lending.
He may be right about Auckland as Westpac pointed out last week. There does not seem to be a housing shortage there, just a whole bunch of people who want to get in before prices rise further. If it is an Auckland problem we should have an Auckland solution. In most of the country house prices have hardly moved.
Maybe the best way to reduce demand for housing in Auckland is to set a speed limit of 6% of a banks new lending at over 80% LVR in Auckland and not worry about the rest of the country. That would even out population growth pretty quickly. If a starter home in auckland is $600,000 and you need $120,000 as a deposit there , Hamilton will look pretty attractive if a starter home is $300,000 and you only need $15,000 there that you can get from Kiwisaver.
Wont even need Len's new train set then.
Listen to the chatter
Interesting that Wheeler is determined to butt heads with Key on this
He appears set on a mission
Does he know something that we don't?
Is a train wreck coming down the line?
Perhaps he is throwing down the gauntlet to Key
Suck it up or find another yes-boy
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