The announcement today by the Governor of the Reserve Bank Mr Wheeler, has one simple aim in mind: To “shock” investors and the public in general into believing that these new rules will dampen the property market.
It will do just the opposite and I predict the “shelf life” of the suggested new rules will be less than 30 days.
There will be unintended consequences which will play right into the hands of investors to the detriment of the ordinary first home home buyer and to the renters.
The problem is that the academics who dream these ideas up have no idea how these rules will work, relying on text book theories and not on practical solutions, let alone getting advice from experts in the market.
Let us look at some of the “rules” the Governor wants to introduce:
The new rules will come into effect on 1st October affecting the Auckland City area only. That gives investors plenty of time to re arrange their affairs, and to buy more properties.
There will be a “discussion paper” introduced by the Governor for input in the meanwhile and I will bet that by the time that discussion paper comes out the other end there will be more holes in it than a slice of Swiss cheese.
The proposed 30% deposit rule will not affect two thirds of the market, the Mums and Dads selling their homes, who will continue buying and selling free from any hindrance thus setting the price for property as they have been doing all along .
The biggest effect will be to push investors into the provinces where prices are much more reasonable. If you are living in Hamilton, Huntly, Mercer, Cambridge , Tauranga, Thames and all the other areas North and South of Auckland City you might be either getting very nervous or gearing up for a bonanza. The good Governor has even raised the amount allowed by banks for lending in these in these areas from 10% to to 15% so look around and take note. There could well be a wave of investors heading out of Auckland to a place near you.
Another effect could well play right into the hands of investors with rental property. One of the reasons that Auckland rents are still so reasonable is that investors are providing large amounts of rentals which keeps prices down If investors withdraw from the Auckland market, the long term effect will be fewer houses to rent and higher rents as a result. Those investors who hang in may soon thank the Governor for his foresight and generosity.
No doubt investors will now form partnerships using group assets and leveraging in combination so as to continue buying up big so long as the market stays hot.
Second Tier lenders will have a field day. Already several have appeared and announced their willingness to top up any shortfalls in deposits or even provide 100% finance. This is exactly how the old Finance Companies got started in the 1960’s and 70’s when harsh lending distorted the market at the time ( I know I was there).
Has no one learned anything from the collapse of the Finance companies only a few years ago?
An interesting question will be what or who is an “investor”? If Mum and Dad decide to buy an investment house so their solo Mum daughter and two kids can have some where to live, will they be classed as investors?
Likewise if the same Mum and Dad want to buy a city pad for work convenience, will that be an “investment” as well ?
There is of course there is the small matter of the overseas buyers (Asians as they are commonly classified as). These people don’t need our local banks. They can borrow all they went from their local banks at almost zero percent.
They will have even less competition than before, and for them the new rules will hardly tinkle the tea cups.
It is also interesting to note that commercial property is not mentioned, and as that field of investment is on the boil already it could get hotter yet.
This is how I see it playing out. So long as the market remains strong, there will be countless ways investors will get around the rules.
That would be a shame as bad rules make a mockery of order and good business.
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Olly Newland
www.ollynewland.co.nz Used with permission.
55 Comments
"If investors withdraw from the Auckland market, the long term effect will be fewer houses to rent and higher rents as a result."
Faulty logic there - if investors withdraw from the Auckland market the houses aren't suddenly going to get up and walk away. Either house prices will drop, allowing more first home buyers and lower demand for rentals, or they won't, so investors will stay strong. Basically nobody builds a house to be a rental property - apartments yes, but that's a pretty separate market.
Absolutely. I find it hilarious this guy even gets a column. I went and looked at a place that his company was renting out and they were desperate to rent it out because it was such a dog.
No thanks Ollie, but if the world turns upside down and your broken maths become the rule then you might get someone in!
No OLLIE is right ............. what happened to the 20% LTVR that would be the silver bullet .....our salvation in October last year ?
Now 30% deposit is required
WTF ?
Whats the urban slang definition of insanity again ?
Next it will be 40% than 50% then 100% , and the Asians who are buying with offshore funds will become our landlords
Here's something for those rocket scientists at the RBNZ :-
You cannot control the free market with weak, sloppy , hard to manage and police , interventions
Maybe you can police the booming market...even if in its infancy.....trafficking in Visas and Baby and housing Packages.
http://www.bloomberg.com/news/articles/2015-05-13/chinese-maternity-tou…
Expect a no holds barred New Zealand baby boomer, coming to a city near you.
Probably part of our free trade deal...eh..Mr Key.
Olly, you seem to be missing the RBNZ's main goal here, which is to promote financial system stability (house price inflation only enters the equation insofar as it affects stability, or fuels core inflation). The upshot of the proposed changes will be greater equity backing in the Auckland housing stock with respect to bank lending - pretty clear cut, really. Of course there will be loop holes, but so long as the average LVR decreases, the financial system is more robust to shocks caused by a steep decline in Auckland house prices (I know that's not 100% technically correct, if the measures to increase LVR cause house-price inflation in and of themselves, but it's close enough). It would also be fair to say that if investors in third tier lenders get burned by that sector being done-over by a correction in house prices, they should be afforded little sympathy, unless of course they can provide a doctor's note for severe amnesia.
Exactly. It is an external sudden shock that has the potential to prick the bubble and cause a temporary liquidity crisis - GFC2. That's Wheeler's focus and that's why he has acted. And the fact that he has acted suggests everyone ought to be thinking about it from a personal perspective.
The current situation with foreign investors buying so many properties in NZ puts financial stability at huge risk.
There is nothing stopping them from cashing up instantaneously after a major event like the Japanese did in the late 80s. The price of high end properties in NZ plunged overnight at that time.
If the RBNZ wants stability they need restrictions on foreign buyers, big stamp duties on their sales so they think twice about just short term speculation and serious punishment for those who circumvent the rules.
It's just embarrassing that the Government have blinkers on this issue. It is all going to end in tears.
Olly you better get some for sale signs up soon...
There will be more holes in it than a slice of Swiss cheese.
Listen to Shaun Plunket interviewing Kirk Hope of the Bankers Association
For the purpose of these rules
An investment property will be any property that has a mortgage over it that is not "owner occupied"
There are 450,000 family trusts in New Zealand, many of which are property owning trusts
The rules are still under negotiation
wait for the squeals and wait for the exemptions to kick in
http://www.radiolive.co.nz/AUDIO-New-rules-specific-to-Auckland-propert…
The data shows that mums and dads as you call them, are far less then 66% of the market as you claim, which is probably just your opinion as far as I can tell. The number of owner occupier has been falling for at least the last 5 years, in what parallel universe could that equate to 66% of buyers being owner occupiers?
As has been pointed out, the stock does not change regardless of ownership, so just wishful thinking on your part.
On all measures this is the biggest bubble NZ has ever had, the snapback will be watchable.
Oh pshaw, Mr Newland.
We haven't had legitimate investment in residential property in Auckland for years. So, the RBNZ proposal isn't designed to do anything except send a clear message to the government: "It's nothing to do with us". Of course they will implement it no matter how tortuous the rules because it is their "Get Out of Jail Free" card.
Back in the good old days of the Soviet Union there was a select band of Western analysts who were Kremlinologists. They would decipher all the subtle coded messages contained in the public utterances of the Soviet leadership to try to understand what they were really saying. We now need to resurrect those skills to analyse what our most mandarin of institutions is really saying.
The big clue is their prediction that these rules will knock 2-4% off the rate of house price escalation in Auckland. So they still expect prices to carry on rising. What they are saying is that they can't do anything to stop prices rising; they can limit the potential damage to the banking system if everything goes tits up. But that is it.
It's a return from deep behind the baseline to the fabled doubles partnership of John Key and Len Brown.
"The big clue is their prediction that these rules will knock 2-4% off the rate of house price escalation in Auckland. So they still expect prices to carry on rising."
Not necessarily - if underlying price growth slowed to 2%, they'd predict their rules would result in -2% to 0% house price inflation. It doesn't all stop at zero!
It really doesn't matter.
The RBNZ are doing what they are doing to wrap a little insurance around the banking industry while signalling that they cannot do any more. They are passing the responsibility back to the government and Auckland Council. It doesn't matter whether Auckland house prices stagnate, rocket quickly or rocket slowly.
We now have the government, Auckland Council and the RBNZ standing back with thumbs pressed to their foreheads saying "Not My Problem". Brilliant.
As you say above only a severe shock to the whole economy will burst the bubble. It would have to be severe enough to force redundancies so that households were unable to meet their mortgage commitments.
But given the existing and provable level of demand for residential housing in Auckland I am not sure how much carnage such a black swan would cause.
There is of course there is the small matter of the overseas buyers (Asians as they are commonly classified as). These people don’t need our local banks. They can borrow all they went from their local banks at almost zero percent.
Where does Olly get this garbage? I worked for a major Japanese company in Japan where we were offered preferential mortgage rates compared to other borrowers. The interest rate was closer to 3.5% but you would never be allowed to borrow that money to speculate on NZ houses. In the case of China, the idea that you can borrow at close to 0% is complete twaddle.
It's very difficult to argue against such a good policy isn't it? Hence, fear mongering is the most effective response?
Let's have a look at Olly's argument;
The biggest effect will be to push investors into the provinces where prices are much more reasonable
Maybe. And if this poses a risk to financial stability the 30% investor LVR can be extended to the provinces.
One of the reasons that Auckland rents are still so reasonable is that investors are providing large amounts of rentals which keeps prices down If investors withdraw from the Auckland market, the long term effect will be fewer houses to rent and higher rents as a result
Laughable. If an investor sells, it's to another investor or to an owner occupier.
No doubt investors will now form partnerships using group assets and leveraging in combination so as to continue buying up big so long as the market stays hot
So there are lots of investors out there with low leverage who are happy to pool assets with those leveraged to the gills? Really?? Who are these idiots?
what or who is an “investor”? If Mum and Dad decide to buy an investment house so their solo Mum daughter and two kids can have some where to live, will they be classed as investors?
This one is easy. If a family has multiple mortgaged properties that they use, the test should be whether they derive income/rent from the property. If there are families out there who can afford 2-3 mortgages without any rental income then good luck to them (can't be many of these).
There is of course there is the small matter of the overseas buyers
So because there is more than one problem we shouldn't solve any of them?
And regarding trusts - surely if a trustee does not live in a property, it is not owner occupied, and therefore subject to the rules.
I'll raise you your 30 day prediction and bet this rule won't be removed in Auckland during your lifetime.
I sense these trust rules making tennancies much more complicated. Instead of a tennancy agreement new tennants might become beneficiaries of the trusts but not trustees, their brnefit according to the trust deed would be limited to occupancy of the property and they would have (pperhaps) a loan issued them for the duration of the tennancy which they would have to pay back to the trust. Just an uninformed idea of mine, reality will probably be more complicated.
I guess there will be many potential loopholes. The RBNZ seem to be making sounds about banks acting 'in the spirit of the rules' so I wonder what sort of enforcement/audit regime (if any) will be in place for this new asset class?
There is a risk of having rules that are too complicated - but perhaps banks would need to actually look at who contributed the property to the trust and only if this person (or perhaps an immediate family member) lives in the property would it be owner occupied? Or if the trust is buying the property then look at who is lending the money to the trust?
That would exclude charitable trusts / estate trusts where the beneficiaries have no relation at all whatsoever / could simply have been a mate of the person who set up the trust. Exceptions to the exceptions?
The new rules will essentially be less effective than trying to use a butterfly net to hold water. I am looking forward to the OCR dropping though, ( All my Auckland property has achieved sufficient capital growth to push them well over the new threshold in the 2 years since I bought the last one, might actually look to buy 1 more before October )
I didn't see Olly mention China or Japan for that matter so don't make it up.
JC you must have been mistaken in which country you were working
Japans 35 year mortgage rates are around 1.47% pa..
Read:
http://www.bloomberg.com/news/articles/2015-01-07/record-low-mortgage-r…
... how much of the " immigration " factor is newbie foreigners coming to New Zealand , as opposed to Kiwi citizens who've gotten totally shafted by the new anti-Kiwi rules in Australia ( introduced in 2002 by their John Howard , and gleefully agreed to by our Helen Clark ) ...
There's a lot of us , 500 000 or so , being treated as second-class residents by the Australian authorities ...
... meebee we ought to roll up our shirtsleeves and construct many more accommodation units in Auckland , and stop faffing around with dopey LVR's and other low grade dumb ideas ...
The RB is doing what it can, and in it's mandate this move is about protecting us from the consequences of a banking collapse. Pity the National Government is negligent of it's share of responsibilities. Only it can deal with such things as the fraudulent rort called foreign students. If they dealt with that Aucklanders would not be in the current housing crisis.
oh such a scary scenario Olly, none of your consequences are really bad at all, even with your exaggerated scare tactics, all of them are much better than blowing up a massive bubble, that affects everyone when it eventually does burst.
Does Olly just want the market to regulate itself like it did in the states? with massive increases until it finally hit in-sustainability and dropped all over by 30-40%
The market someones might regulate itself, but it can be extremely destructive when it does it like the way it happened in the US, and completely unnecessary.
that worked well in USA banks regulating themselves, all they could see was the bonus and almost tipped the whole world into depression, They now have rules and watchdogs watching more carefully now, but they are at it again this time its car loans
http://www.thefiscaltimes.com/2015/03/16/Here-s-Why-Our-Auto-Loan-Debt-…
Very good article Ollie.....The RBNZ have snookered themselves once again.....I feel not a thread of pity for them when they make such stupid decisions!!!
NZ cannot afford to have such incompetent people at the helm of the RBNZ.
Bill English needs to be questioning Wheeler on whether he has met his PTA requirements!!!
NZ needs a Government and Bureaucracy who run efficient effective Government.....we cannot afford to have this manic-depressive style continue unabated......the complete lack of discipline is delivering unruly, chaotic and piss poor policy that is not beneficial to the majority of NZ'ers......
I for one think it is entirely appropriate to be asking for Wheelers resignation!!
I agree with Olly, I don't see the problem. Just leave things alone, if the market corrects or worse then speculators only have themselves to blame for their predicament, there's been enough warnings. Civil servants interfering in the market place is certain to aggravate the situation, or maybe precipitate a crash.
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