By David Hargreaves
Trying to interpret a Reserve Bank Governor's speech can almost be described as a peculiar kind of art form.
The important parts of such speeches are not what is said, but what is not said, or at least might be being said without being said. The observer of the speech needs to spot moments at which a clause within that speech might prompt the raising of a single eyebrow from the governor. Aha! There's the point! Or has he just got an itchy nose?
Governor Graeme Wheeler's speech last week was on the face of it an earnest, if rather dry, dissertation on some of the issues currently facing the RBNZ.
And yet, pulling myself back from the actual words for the moment, I was suddenly confronted with the image of the governor as a small boy who's just been given a train set for Christmas but has been told he must first sit at the table and endure dry roast turkey dinner with granny and ghastly great auntie Doreen for two hours before being allowed to play with it.
Yep, the governor has some new toys and reading carefully between the lines and straining for signs of quivering eyebrows, you get the firm impression he's just itching to play with them.
It seems therefore that much sooner rather than later New Zealand is in for what may or may not become known as "a dose of the old macros".
As we know the RBNZ has been moving with about as much speed as it can muster toward creation of four new "macro-prudential tools", which can be used alongside its traditional monetary policy tool - the rather blunt instrument that is the Official Cash Rate. Interest.co.nz has covered the development of the macro-prudential tools extensively, as can be seen here. Probably the best explanation of what the various tools entail is contained in this piece by Gareth Vaughan.
The particular tool that is worth getting your head around is the one that places limits on high loan to valuation lending. At the moment the banks are estimated to have about 30% of their lending book in loans where the amount advanced is 80% or more of the value of the property - or taken another way, when the buyers have a deposit of only 20% or less.
As might be gathered from my comments so far, there's nothing explicitly stated in last week's speech that says: "I've got the tools and I'm gonna use them!" But I include a couple of passages that I think indicate the most likely current path of thinking on what might happen:
Macro-prudential instruments directed at the financial sector risks arising from the housing sector have been deployed in several countries (eg., Canada, Israel, Korea, Norway, and Sweden), with weight often put on restrictions around the level of high LVR lending.
While there are important design issues to address in devising such measures, the empirical evidence to date suggests that during episodes of quickly rising real estate prices, LVR limits can help reduce the incidence of credit booms and decrease the probability of financial distress and sub-par growth following the boom.
One should be cautious in predicting the size of the impact of such measures when house prices are increasing rapidly, but we believe that macro-prudential instruments could have played a useful role in building up capital buffers and reducing credit demand and asset price pressures in the housing price boom of 2003-2007.
And then this bit:
This is where macro-prudential policies can play a useful role. Capital and liquidity overlays can help build up buffers in the banking system while adding to the cost of bank funding. And loan-to-value restrictions may help to reduce the actual supply of mortgage lending.
It certainly seems fair to presume, as economists of some of the larger banks already have, that taken as read, this means the RBNZ favours putting limits on high LVR lending. The assumption is that this will take the form of a "speed limit", IE the big banks will be given a maximum proportion of their books that can be loaned out on 80%-plus mortgages.
Just for example, if we take the current ratio of total high LVR lending among the banks of about 30% and then say the banks from now on, applying to new loans, can't have more than 25% of their books in high LVR lending, this would theoretically dampen demand and take pressure off rising houses.
It would seem clear enough that the RBNZ is keen to stop the rise again of the speculator, the ballsy investor who comes along and starts buying houses like they are going out of fashion with 90% mortgages in the belief that prices will keep going up. Get sufficient people like that in the market and, of course, prices will keep going up for some time. Big bubble. Pop. Ouch. We've been here before.
So, if such behaviour can be avoided by LVR limits, all well and good. But nothing in life is simple.
If you go back not many months, the utterances coming from the RBNZ appeared not to favour LVR limits. And the apparent sudden enthusiasm for them now is a bit worrying. What exactly changed the RBNZ's mind?
Unintended consequences
It's all right having the tools, but how well thought out have the consequences been? Is enthusiasm to "try out" these macro-prudential tools blinkering the RBNZ to what might be unintended consequences?
Let us try to imagine what could happen.
For a start, one of the anecdotal causes of the hot market, particularly in Auckland, is overseas investors coming here with suitcases stuffed with cash and buying up large. There is no hard evidence as to just how widespread such activity really is. To my knowledge there is no meaningful data available.
But obviously, cash-rich buyers, whether they be immigrants, overseas-based buyers, or Kiwis returning home with proceeds from sale of an offshore home will not be in the least bit disadvantaged by a high LVR limit policy. On the contrary, it should be a help. It will take some buyers out of the market. So, possibly we might see even more overseas-based buyers.
Ask yourself then, who is going to be affected? Well, it will be the first-time buyers won't it?
Young kiwi couples looking for their first nest and already having a struggle, could see the uphill gradient become even more severe under this policy.
A little lunacy
I had actually completely forgotten about it, but in thinking about writing this piece I was suddenly reminded of the experience of myself and my then fiance buying a first home in Wellington in the early 1990s. It was a struggle. In the end we borrowed 87% from the Countrywide Bank (long-since disappeared into the National Bank, which is not so long-since disappeared into the ANZ). Our deposit, such as it was, was made up 25% of money I borrowed from the journalist's credit union - but obviously didn't tell the bank about - 5% from the sale of a horse (don't even ask) and 70% from a very dishevelled savings programme.
It was absolute lunacy now I look back on it. But there you go. The frivolity of youth.
The one good thing we had going for us was that we might have been savings and asset-poor but we were strong on cash flow, both earning much higher than the average wage. And that meant we could keep the wolf from the door every month and meet the commitments. We were on the "housing ladder".
I've got no reason to believe the 20-and-30-somethings of today are any different. They will do what it takes to get a house. And that's what worries me.
According to Real Estate Institute sales figures for April, the median house price in Auckland was NZ$555,000. So, even if our first-home buyers are able to get in somewhere below the median price, say at NZ$400,000, they might need a deposit of NZ$80,000 under the new LVR limits policy. That sounds like a lot to save.
The worry is that the final composition of that NZ$80,000 for many couples might actually be NZ$40,000 of savings, NZ$20,000 advanced on the never-never from the in-laws, and NZ$20,000 borrowed from some second-tier lender at possibly exorbitant interest rates that the primary lender - the bank - will not be told about.
Recipe for disaster
It is a recipe for disaster, potentially.
So, yes, the LVR limits might help to insulate the banks against a housing bubble and some steam might be taken out of the housing market (though depending on the number of foreign investors and other people simply finding the money anyway this might be minimal). But the big risk is that those already feeling excluded from the housing market will feel more so. Do we really want that?
It seems to me that too much is being left to the Reserve Bank. Controlling the housing market should not be the RBNZ's job.
The Government can say it is trying to move on house prices by its development of a housing accord with the Auckland Council. Trouble is, nobody believes the targeted 39,000 in three years are going to be magically produced by the private sector - unless the Government offers some real incentives.
And likewise the Government has shown no inclination to act on curbing what I see as the biggest future threat to the New Zealand housing market, unlimited foreign capital coming in and driving up house prices.
So, really we've got a Government not doing its job and a central bank trying to do a job it really shouldn't be doing. I see problems ahead.
12 Comments
Are foreign investors considered first time buyers?
And what if you buy a first house with a 5% deposit, then 2 years later you need to move, now you need say a 20% deposit!
I would prefer a much higher LVR applying to investment properties (excluding new builds). In fact from a risk point of view it probably makes more sense too - if an investor makes a loss on a property they can just wind up the company, whereas someone who lives in the home still has to pay it back. It would also help prevent the tax dodge where you move all of your debt into the investment property. So how about a 50% LVR on investment properties?
The banks could simply check to see if a kiwi saver withdrawal had been approved, if it had your cleared for a 5% deposit, if not you need 20%. That would ensure it was both a local and a first time buyer without the bank having to lift a finger to find out.
If you have to move into another home there would be a step up in the deposit required. That's simply a risk of home buying, it's no different to having a 20% deposit to start with only to find house prices fall 15% before your next move. There is always the option of renting your home out for a while and getting a rental yourself for those who find themselves in those positions.
Very well written piece. The only people who will be kept out of the housing market by restrictions on LVRs will be honest prudent first home buyers without parents who own houses. Those are the people we want to help not hurt.
There are so many ways around these kind of restrictions they will achieve nothing except put more mortgage stress on young people who might finish up with part of their borrowing at 12% over three years instead of 5% over 30. How does that achieve anything?
As David says controlling the housing market is not RBNZs job. Stability of the banking system is. If they think the banks are not holding enough capital against riskier loans they can make them hold more. They have already done that. It would be better for Bill English to get the bank CEOs in and tell them the Government wants them to go easy on lending to people with multiple rentals if that is the problem, or tighten up their affordability models to ensure loans can still be repaid at much higher interest rates. Up to the banks then to play ball and keep the authorities happy. LVR restrictions are just dopy.
I do think there is a case to restrict foreign buyers to new builds in Auckland and Christchurch as that should help on the supply side as well as restricting demand for existing property.
Absolutely. It will cut people out of the market. This will cause social ills, and encourage young people to seek their livehoods offshore. However, the price of home ownership and the strengthening of communities by people owning their own home is government action, not Reservce Bank. Anyone in the media or government that says otherwise should have to explain the exact process they imagine will happen.
What the macro tools should do is ensure that when there is a major housing downturn, the banks are better able to cope, as they should (in theory) be less exposed to risky loans and have greater reserves. I only see the Macro tools as being about ensuring more financial stability in the event of a crash, not lowering housing prices.
(I also think the only way the number of homes could be built that would lower prices is by a strongly interventionist government bulk putting up factory prepared homes, but that is another issue).
It is inelastic supply of housing that "cuts people out of the market". The tightness or looseness of mortgage credit merely determines the debt level taken on by those who do not miss out, and the price of houses.
Big finance and Big property LOVE a combination of inelastic supply of housing and loose credit; it benefits no-one but them.
The people who won't manage to buy a house now, wouldn't have managed anyway. Had mortgage credit remained loose, house prices would go up faster than they can save equity.
The only difference that tightening credit now will make, is that the people who do NOT miss out, will take on less debt to do so and the house price will not have inflated so much while they were saving.
The only policy that actually is "home ownership" policy, is a "liberalise housing supply" policy.
Seems like some mainstream media commentators in Pommyland are FINALLY waking up:
http://www.macrobusiness.com.au/2013/06/uk-doubles-down-on-housing-disaster/
"George Osborne is playing a low political trick with housing"
"…in Britain [housing] is the great scandal of our times. Property prices were one of the four domestic booms — along with immigration, public spending and private debt — that fuelled the years of growth preceding the crash. Property also played a major part in the crash.
It is a primary source of inequality, because those who own assets have such an advantage over those who don’t. It transfers money from the young and poor to the old and rich. And housing benefit costs £24 billion each year.
So the problem is vast. Luckily, the solution is obvious: build, build, build. Forcibly deport all nimbys and build for England and St George. A massive programme of residential construction, particularly in and around London, would increase supply, reduce prices over the medium-term and create jobs for the young and low-skilled. Nor would it destroy English land, 90 per cent of which is unspoiled.
Yet confronted with the twin nuisances of nimbyism and planning regulation, Osborne has chosen otherwise. Rather than devise and apply the remedy, he is exacerbating the problem.
The Funding for Lending Scheme, which subsidises the cost of mortgages, has been augmented by a Help to Buy scheme that forces taxpayers — me and you — to underwrite billions in mortgages to people who can’t afford a house.
These are among the stupidest policies ever devised in Whitehall, and a barely disguised admission of failure. It will benefit current rather than future owners, create distorting subsidies that are hard to remove, raise rather than reduce property prices, sustain our addiction to debt, and further inflate an asset bubble.
Politicians inflate asset bubbles for the simple reason that owners of assets are more likely to vote. But there has never been an economic bubble in history that didn’t eventually meet a pin. The trick of modern democracy is to make sure the pin arrives after you have left high office. This is the Chancellor’s gamble: that he can enjoy the bubble and delay the pin. It is myopic, selfish and inexcusable.
London’s poor suffer the consequences most of all. Britain’s housing policy is a moral, social, economic and geographic catastrophe. Yet by deluding the middle class into thinking they are getting richer, it might also be political gold. Sometimes, democracy stinks....."
Another useless debate when the real changes are outside the scope of RBNZ to use.
1. Control internal destination of external migrants.
2. Impose a tax on property purchases by overseas investors eg similar to Singapore , Hong kong and Australia's equivalent restrictions. Just make them bigger than the others!
Bank deposits in NZ not safe...serious risk of savings being stolen in a bank failure....bank failure now a serious risk when property bubble prices collapse...govt not prepared to act to protect savings...but govt willing to allow continued mortgage lending of created credit by already massively at risk banks into an already seriously overbloated property sector.
"Every country in the OECD has deposit insurance, except New Zealand," she said, "We recommend it as [a] safety valve even if you have OBR."
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10888407
http://www.marketoracle.co.uk/Article40711.html
Get rid of the income tax free status for foreign investors and many of the problems will go away. You can't have the local market being taxed and the foreign investors not paying any income tax.
Ensure that all speculators are paying their taxes.
Or alternatively do away with all the taxes and have a Automatic Payment Transaction Tax on everything - no exemptions.
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