By David Hargreaves
As the dust starts to settle on announcement of the Reserve Bank's new restrictions on property investment, which specifically target Auckland's runaway housing market, the focus can soon be expected to shift to what the errant Auckland house prices do in response.
The RBNZ has to some extent set expectations in this regard by saying the new measures might trim 2-4% off Auckland's house price inflation.
So, from about now (notwithstanding that the moves aren't officially due to take effect till October 1) the likes of the bank economists will be crunching the numbers to see if that sort of impact (or indeed more) is achieved.
But In the midst of all this, it would be easy to lose sight of what our central bank is actually aiming to achieve.
There are two main reasons why the RBNZ can be concerned about rising house prices. One is a 'monetary policy' reason - that the rising house prices might fuel inflation (though remember house prices themselves aren't included in the Consumer Price Index). The second is a 'financial stability' issue - that the rising house prices might be accompanied by big increases in debt levels that would pose a threat to the financial system in the event of a sudden, sharp, correction in house prices.
No inflation worries
At the moment there are absolutely no worries about inflation in the near term and in fact the bigger short term risk is we may push toward deflation.
But, of course, the RBNZ is very worried about the risks to financial stability. And that's why it is doing what it is doing.
It is worth repeating that. The RBNZ is reining in property investors in Auckland because it is worried about risks to the financial system. It is not per se concerned about how much the average young couple has to stump up with to get the keys to their own house.
So, the RBNZ in coming months and years will be measuring the success or otherwise of this policy by whether the moves have decreased the risks to our financial system, not whether more beaming young couples are standing on doorsteps waving.
There's the old joke about if you owe the bank $10,000 and can't pay you've got a problem, but if you owe the bank $10 million and can't pay the bank has got a problem.
Our prudent banks
Banks are always incredibly cautious and prudent until subsequent events (a big fall in asset values for example) prove that they haven't actually been cautious and prudent at all. That's when the fun starts.
These new RBNZ moves are saving the banks from themselves, forcing them to put a ceiling on the proportional size of loans to investors. This will irritate the hell out of them (the banks), because they are always cautious and prudent and therefore don't need telling how to run their business, while madly scrambling after customers to meet targets to keep increasing the size of their loan portfolios.
It's worth looking at the impact of the new measures if we were (hey, and let's hope these measures will help to avoid it) to witness Aucklandgeddon and a devastating fall in house price values.
To take a very basic example, if a mum and dad property investor team paid $1 million (very possible, let's face it) for an Auckland property and borrowed a bog standard 80% of value ($800,000), they would then have $200,000 equity. Therefore they could stand a 20% fall in Auckland house prices before losing their equity.
More to the point, the couple's bank could stand a 20% fall in Auckland house prices before IT starts to lose money...
Reined in
Under the new rules our mum and dad will only be able to borrow $700,000 and they will undoubtedly carp about that. But, the good news is they (and the bank) would actually be able to stand a 30% fall in Auckland house prices before going underground. So, in one fell swoop the buffer for such investors and their banks has actually been increased by some 50%.
The significant thing about all this is that if there was to be a big downturn in the Auckland market, it is the investment properties that would be sold first. If we were to see a whole lot of houses previously valued at a $1 million all selling for $700,000 then under the current situation the banks could easily be losing $100,000 a time - which would mount up for them pretty quickly. Financial disorder would be in the offing.
An Aucklandgeddon scenario wouldn't be great for owner-occupiers either - but of course these are the people who would probably sit tight, assuming they can hold on to jobs. After all, if you don't sell then a massive fall in the valuation of your house is merely a book-keeping exercise (albeit an alarming one). When I was in England in the mid-1990s I actually knew some owner-occupiers who were still in negative equity following the downturn that kicked in around 1989. They were a bit depressed about it, but they still had a roof over their heads, and I should imagine by about 2000 they were probably feeling fairly perky about life.
So, the true measure of these RBNZ moves will be whether the banking sector becomes sufficiently de-risked that it can bear a downturn in the housing market. And you have to say, these moves have the potential to considerably insulate our banks against the risks.
Going up
I think it is eminently possible, nay probable, that Auckland prices will keep going up strongly in the near term.
The RBNZ's estimate that as many as 20% of purchases in New Zealand are from cash buyers (with perhaps half of these overseas investors) was most illuminating. The RBNZ did not give Auckland-specific figures, though you could speculate that the percentage of both cash buyers and overseas investors may well be higher in Auckland than the rest of the country.*
But even if you talk about around a fifth of the potential Auckland house buyers being impervious to any credit-driven controls, then you have to say that fifth can keep driving prices up. But the point about that is those buyers will be taking all the risk themselves. If they lose money it's not really anything for the RBNZ to worry about.
So, remember, the RBNZ is not some fairy godmother watching over Auckland house prices to get a better deal for the first home buyers.
If as a country we are sufficiently concerned about that issue then its up to the Government to do something about that (little pink pigs flying around, anybody?).
The RBNZ is doing its best to ensure we don't end up as some broken-bottomed shell of an economy sinking into the Pacific. And that's its job.
*This paragraph was subsequently altered to clarify that the RBNZ estimates referred to the whole of the country, and not just Auckland.
30 Comments
Does NZ have a "basket case" economy? Is it almost entirely based on residential property? Dairy seems to be on the way down and out, but how is the rest of the agricultural sector doing, and is it enough to keep things going should the property market implode? Do we export anything besides agricultural products? Do we even have a manufacturing sector any more? I feel these are important questions that need answering.
Maybe the LTVR rules have perversely stimulated the market , because buyers take the view that a whole folk with no cash or savings are excluded , so this is as good as it gets
So what does Wheeler do , he INCREASES the % of LTVR .
And in all seriousness , if prices do come down then I , who has never owned more than one residential property here , will buy at least one or more as a long term investment for our kids .
BUT , not at these stupid prices
Oh I pity you - you must be a very poor man!!!
We're all cashing in on the boom like there's no tomorrow - buying and buying Auckland properties in a panic - making our $$millions in tax free capital gains while sucking every last tax refund dollar out of IRD ;) ;)
*sarcasm*
The new LVR rules do only affect those with multiple properties.
This is good. In reality it will be a very high Limbo bar, but that's not neccessarily a bad thing. The idea is to adjust the market so it can grow favourably where you want, not try to stuff and force it into doing things. A technique which also works if you're trying to roll up a waterbed bladder.... push too hard and fast, and it just bounces back and smacks you down.
This article appears to assume that if there was a large correction the mum and dad investors would be ok if they had 30% equity in the property.
That may be correct, however I know of investors where the bank called on their loan to be repaid due to the lender no longer meeting the banks lending requirements.
How comfortable will the banks be rolling over these loans with no equity in the deal?
The MSM including Nat Rad got it wrong in their enthusiasm for any action at all from anyone but the reporting is getting more accurate now in some places.
I note that Fairfax are getting it right (http://www.stuff.co.nz/business/money/68515394/home-buyers-shouldnt-dan…) admittedly in the "Opinion" section.
And note that Don Brash got it 100% right before the announcement was even made (http://www.radionz.co.nz/national/programmes/morningreport/audio/201754…)
Whatever the outcome , many people are hanging their hat on the ideas that suddenly houses will be affordable for everyone and we will live in this perfect utopia playing cricket in the back yard on our own section.
Anyone thinking like this is dreaming
It simply is not going to happen anytime soon because of people like us ( you and me ) .
If houses suddenly became affordable , we specifically , who have a paid up mortgage on our home , will go out and buy 3 affordable homes , one for each of our children ( 2 of whom are adults) .
So simply put , demand will continue to outstrip supply for the foreseeable future , and at least until we
Make more land available and reduce supply bottlenecks
Slow down migration
Stop Auckland council rorting the system in fees that bear no relation to actual costs
Curious
A basic example, if an investor paid $1 million for an Auckland property and borrowed 80% of value ($800,000), they would then have $200,000 equity
Do banks use the price paid as the valuation when calculating the amount they are willing to lend or do they have their own internal valuation process which may well be somewhat less
and
I can assure you that if property prices tank by 20% the bank's internal desk-assessment lending-valuation will be a lot less than $800,000, probably more like $700,000 and 80% of that will be $560,000 so the investor, having borrowed $800,000, will face a margin call of $240,000
and worse still
If the 70% LVR has kicked in the bank facility suddenly drops to $490,000 for a margin call of $310,000
Banks make you use an independent external valuer and you only face a margin call if you stop making your repayments. So if the market falls the banks don't say to all their clients, go revalue all your houses. If you make your payments nothing happens. If you don't pay they sell off your assets to recover their loan and what they can't recover becomes an impairment expense on their balance sheet. The question then becomes, how much impairment can the banks BS withstand.
DH - I think everyone is missing the point!!!
What if the RBNZ had a different focus.......instead they measured the costs of Government and the public services with all its frills, so now the RBNZ implements an LTVCR Lowering the Vulture Cost Ratio......now I'm really liking this 30% that Wheeler is on about.......of course he will have to shave 30% of his office as well......swapping shiny shoes for boots is far better for financial stability!!
So what you're saying is the size of the public system and the spending they do has NO affect at all on credit..!!!! Yeah Right !!
Think for one moment about every public servants mortgage and then think who has to generate the taxable income to sustain that mortgage.......you know what they say about mushrooms don't you??
"RBNZ's estimate that as many as 20% of purchases are from cash buyers (with perhaps half of these overseas investors)"
I would assume this estimate was for NZ as a whole - does anyone know for sure? If that's the case then 30% of Auckland's market could be overseas investors (since they are mostly in Auckland).
It is not only NZ housing that is distorted by migrants, wages too get the treatment - the other way, down! See here how the BOE sees their (UK) recent, unpleasant experience: thttp://www.dailymail.co.uk/news/article-3079786/Gloomy-Bank-England-dow…
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