By David Hargreaves
The Reserve Bank is probably wishing about now that it had included debt-to-income ratios in the macro-prudential toolkit it got Finance Minister Bill English to sign off on in 2013.
Now a bit over three years down the track we see a central bank that appears to have decided that DTIs are really THE weapon of choice for the country’s galloping house market, but the Government and its Finance Minister are now getting a little shy on it – first behind the scenes and now more overtly.
I must confess, I thought it was a given that the Government would rubber stamp the RBNZ’s request to slip DTIs into the macro-pru toolbox. But I guess in thinking that, I simply wasn’t thinking closely enough about next year’s election. It appears the Government is. Oh yes.
Both the Government and the Opposition parties are already very much on an election footing and we are not into election year yet. It’s going to be a long 12 months – always supposing we don’t get an early visit to the ballot boxes. And I suppose that can’t be ruled out, though I’m not sure any valid reasons exist for calling an early vote at the moment.
Be that as it may, my earlier assumption that the Government would quietly acquiesce to the introduction of DTIs was based on its previous unwillingness to get hands dirty in terms of the demand side of the housing market equation.
Yes, the Government has been happy enough to let the evil Reserve Bank be the fun spoiler that wilfully locks aspiring young New Zealand couples out of first homes.
However, if you really start to boil it down, the hands-off approach has started to let the Government down quite badly.
It’s true the Government has been able to throw its hands in the air and say it can’t stop the RBNZ doing what it will do. But unfortunately for the Government it hasn’t been able to extricate itself – as it might have hope and wished – from the reactions of people to the RBNZ moves.
Explosive fare
The RBNZ’s macro-prudential measures since 2013, expressed through three phases of loan-to-value ratio lending restrictions, have been a bit like an out-of-control Guy Fawkes Night party. The RBNZ’s the guest who comes along, lights the blue touch paper, and sets off the big-banger fireworks. The Government’s the owner of the property that has to go and explain what happened to the angry neighbours the following day.
Now, the Government’s been prepared to do that up till now. But election year is different. The Government will not want any uncontrolled firework combustion resulting in consequences it can’t keep a handle on.
The Government intends to be in charge of the lit matches next year.
If it were to allow the RBNZ to slip DTIs into the macro-pru kit early next year – as the RBNZ would appear to want – it then couldn’t control when the RBNZ might use them. And the RBNZ might well use them at a moment that doesn’t entirely suit the Government and its election campaign.
So, what is likely to happen?
Well, it is beginning to look like delay, delay, delay from the Government, isn’t it?
Certainly there is a valid argument for saying that we should wait and see what happens with LVR3, the 40% deposit restriction for housing investors. Early signs are it is having an effect.
Different this time?
Prominent Auckland broker John Bolton has already said he thinks the RBNZ has with the new move applied a sledgehammer to the housing market. Economists as the country’s biggest bank ANZ said this week that the slowdown currently being seen looked to be “different” this time; that is, likely to be more enduring.
I remain unconvinced. The general body language the RBNZ gave off when it unwrapped LVR3 in July was that it was a ‘holding’ measure to give the housing market some cause to pause while the DTIs were readied for introduction. I didn’t get the impression the RBNZ itself was all that confident the move would have a lasting impact.
There is a risk here that the Government delays and delays the DTI introduction and then in the meantime the impact of this round of LVRS starts to wear off and away goes the housing market again. Then it becomes a real scramble to catch up.
The RBNZ was left palpably scrambling earlier this year when the Auckland-centric second phase of LVRs introduced toward the end of last year essentially failed. The central bank would not want to be left looking at a roaring house market and no ammunition in its weaponry again next year.
However, it might be.
Controlling the agenda
From the Government’s perspective, it will want to control the agenda in election year. Therefore by holding the RBNZ at arm’s length it frees itself from the possibility of uncontrolled events – events that could then be used by the Opposition to set that agenda.
So, it will be no surprises as far as the Government’s concerned. And it will look to control housing issues with its own initiatives.
We can already infer that the supply, supply, supply side of the equation will again be hammered, with the Government committing in a more material way to being directly involved in building more houses. That’s already been clearly signposted, albeit with details very vague.
And I would still suspect that the Government probably has a thing or two up its sleeve ready if needed for unwrapping in next year’s Budget to tackle the demand side. Vancouver-style taxes on foreign investors would be a popular move, for example.
Whistling in the wind
What it all points toward is the RBNZ left whistling in the wind, next year at least, when it comes to getting DTIs installed in the macro-pru kit.
If that’s what happens, then I think it could be pretty unfortunate, to say the least. DTIs seem like a good idea to me. They SHOULD be in the macro-prudential toolkit as an option. It is a clear oversight that they are not. And they should be at least available.
Personally I would prefer to see LVR restrictions lifted and DTIs applied instead.
I think the Government’s taking a bit of a risk all-round here. All I can say is it needs to be confident that it has a plan for the housing market. Because if it denies the RBNZ the chance of using the tool the RBNZ thinks is best to apply against the housing market, and then the housing market takes off again, well, that just increases our risk as a country. And for what? Political expediency.
It doesn’t sound like a great plan to me.
Maybe I’m wrong. Maybe the Government will sign off on DTIs early next year. But somehow it doesn’t look that way at the moment. The election’s getting in the way.
44 Comments
CBIE says "The worst policy mistake is to delay implementation too long, until loan levels and house prices have reached unsustainable levels."
Ireland has experienced a bad housing crisis. They are now not slow in trying to prevent another.
The Central Bank of Ireland says that (DTI and LVR limits) are simply the codification of “prudent norms” and will not interfere the fundamentals of the housing market.
‘As long as changes in house prices are motivated by fundamentals – genuine demand for housing – the rules should have little effect. But if the housing market has become speculative, where credit and house prices grow partly based on expectations of further house price increases, the rules will have a significant effect. The reason is that, at that stage, buyers’ incomes will neither pass the loan-to-income rule, nor will they support sufficient savings to accumulate future deposits. Hence, the (irrational) expectation of ever-increasing prices is thwarted, and credit and house price growth will revert to a sustainable path. Hence, macroprudential regulation, by putting prudent norms in the credit market on a legislative footing, can counteract financial bubbles without significant side effects in normal times.”
“The worst policy mistake is to delay implementation too long, until loan levels and house prices have reached unsustainable levels. As we know all too well in Ireland, at that stage no policy option is appealing.”
Kiwimm, sorry my comment maybe is misleading, totally agree the high cost of shelter is detrimental. New Zealand has an asset bubble , if and when there is a selloff or indeed we just stop selling it to one another, we have a grave risk of of a balance sheet recession down the track. To bring our domestic asset markets back into equilibrium will entail economic pain in one form or another , timing and the factors that initiate the inevitable selling of assets is the only issue .
Ireland is a good country to compare ourselves with. They were a backward agrarian economy but are now an export powerhouse. They were shafted by the Euro which was knowingly mis-sold to them by their French and German imperial bureaucratic overlords. This caused their housing and banking boom and bust.
In our favour we have control of our currency, but in their favour they run a current account surplus. They deserve our admiration.
How did they do this? I cannot believe it was due to subsidies from the EU or membership of the EU, otherwise the rest of the EU would be doing just as well as they are. They have an open for business attitude reflected in their low 12% corporate tax rate compared to our "sod off mate we don't want your jobs" corporate tax rate of 28%.
This sounds like a pitch to fatten the pockets of US corporations, which it does. It also reduces the main obstacle for expansion that every private business faces - a shortage of capital, which can only come from profits reinvested in the company. So instead of being able to expand at 10% with a lower tax rate, they are only able to expand at 5%. Jobs are created by these small and medium sized firms, not by large corporations.
The FHB bid is way lower then market at the moment, they don't really need more shackles, they are wary enough right now....
No need for DTI on Planet Key
https://vimeo.com/102441715 loving it.
Debt has been the way weve grown our NZ economy. It has suited the banks and the last two governments. Who needs productivity growth when you can borrow your way to wealth.
The problem with debt is you have to pay it back.Our biggest assets houses have reached the $1 trillion dollar mark in value and are at a point where people cant afford them even at the lowest rates and now theyre talking DTI.
This government and the previous government should have restricted banks and instead of handing the RB a sledgehammer it have have said protect the long term stability and debt levels.
The biggest risk we have now is interest rate rises that will strangle our economy. There will be no domestic inflation pressure when interest rates rise a fraction but for the sake of our overall economy we need to have houses that people can afford to live in. People dont believe that house prices could drop suddenly. This is just wishful thinking.
"The biggest risk we have now is interest rate rises that will strangle our economy"
No i think its a given that interest rates can't rise anywhere in the world without strangling any economy. Rate rises will only come when defaults start and by then it will be a tsunami...
The biggest risk NOW is by far is lack of new debt growth. Commodity prices won't hold.
A 23 year old teacher who did an undergraduate degree followed by a masters in education would make 56,000 before factoring in extra units which grant extra pay. After 6 years that teacher would be making at least 76,000 and be 29 years old ( still FHB age ). 2 such teachers together would have a household income of at least 152,000 before adding extra units (up to 4 @ 4,000 each), retention ( 3,000 each ), specialist ( 8,000 each), management ( 1,000 each) or anything else, regardless of performance . http://www.education.govt.nz/school/working-in-a-school/teachers/second…
Did I mention the guaranteed annual inflation adjustment? The whole thing sounds decidedly above average to me, especially for those with arts degrees!
The ideal government is a small government that deals mostly with 'law & order', national defence, public healthcare and free primary & secondary education.
The free market should take care of the rest, if you invest in a bubble and it bursts then you'll be wary of doing the same again ( explains some people's refusal to invest in stocks ).
David H, You are correct if DTI is announced will help the current situation instead of waiting before it picks up again like last time.
This should be a Litmus Test for the government.
They themslves do not want to act and being in power are using all tactics to stop agencies who are trying to do something.
Observation by David H are bang on as mentioned by expert1
It feels like this article was written 3 months ago, the Auckland property market is now dead in its tracks, the government is worried DTI could collapse the housing market. If the housing market collapses, people won't spend anymore, this will lead to business closures which in turn leads to layoffs, be very careful what you wish for
Today you own a $500,000 house. The house you want to upgrade to costs $1,000,000. You will have to borrow $500,000 to buy.
If prices fall 20% tomorrow the house you own is now worth $400,000. The house you want to upgrade to costs $800,000. You will have to borrow $400,000 to buy.
$400,000 is less than $500,000.
Well, naturally. I don't fail to see the greater welfare effect.
However, how will you ever stop this asset inflation when you constantly fuel it with incentive?
Essentially, if we don't let prices correct, we are saying "take this double digit return, effectively, risk free." And, in doing that, you are all but confirming that the same condition will hold in future periods.
It sets a dangerous precedent of moral hazard.
Yeah it is normally slow between November to January before it picks up so what is needed is comprehensive approach rather than watch it flying again. People at right places should be one step ahead (Forward thinking) and not a step behind (Unlike our government who god knows is how many steps behind and is step ahead only in supporting their elite friends - forgetting that they represent a nation and not just few). RBNZ is aware of the situation and this time does not want to be caught off guard.
That is one reason that many people say that any meaningful solution can only start with #JKEXIT
Waiting in the wings are many thousands of people with deposits ready and itching to buy when the speculators get spanked. The market will be fantastic when prices drop, number of sales will accelerate as more renters buy and move out causing more speculators to fold. It will be beautiful to watch and no, not everyone goes broke, only the greedy and parasitic.
"Certainly there is a valid argument for saying that we should wait and see what happens with LVR3, the 40% deposit restriction for housing investors. Early signs are it is having an effect."
It should be remembered what the rbnz is meant to be achieving. They want to reduce risks associated with a property market crash.
If every future sale in at either 80% lvr to owner occupiers, or 60% to investors as is the case under LVR3, then over time the housing market will become very robust as more and more property is owned by people with large amounts of equity.
Whatever house prices do is somewhat irrelevant to the rbnz's objective.
If prices keep rising with LVR3 in place then that just means buyers are wealthy and hence not at risk of being forced to sell and going under leading to a downward price spiral and a market 'crash'.
LVR3 alone leads to a very robust housing market.
Ireland only requires a LVR of 80% with Fhb's exempt.
The 60% LVR of the rbnz for investors is very high.
The impact of this is certainly being seen in the Auckland market with sales plummeting and listings up as people lose the confidence in prices continuing to rise there. Prices will likely fall in Auckland as less sale and more listings slowly have there impact on prices.
Even if given the green light by govt. (prob with conditions that English would like to see to ensure its not too onerous) I don't think they will ever be brought in as over time LVR3 cools the Auckland market.
Bit of a misleading title: "The Government is showing signs of wanting to call all the shots on the housing market itself next year"
There are two sides to a market and "all the shots on the housing market" would require activity on both sides. However this article refers just central bank policy, which is on the demand side of the equation the government has always had the ability to modify.
Nothing is likely to be done about the idiotic planning of our various councils. Auckland Council will be free to continue choking the life out of Auckland with insanely constrained council land supply policies.
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