By David Hargreaves
The final step in implementing round 3 of the Reserve Bank's LVR restrictions was taken this week, resulting in barely any comment from the marketplace.
How different to the wave of turbulence that the then new loan to value restrictions caused upon introduction of this macro-prudential tool in 2013.
They say familiarity breeds contempt.
In this instance it's more like a sense of comfort. Now that people know what they are dealing with. Well they have ways of dealing with it.
That's not to say that the new measures won't have some impact, but my feeling is the impact's likely to be little more than a slight drawing of breath of the market.
Given that Auckland already had a 30% investor requirement in place, the move up to 40% wouldn't seem likely to make too much difference there.
Uneven impact?
It might be more interesting to watch what happens in the rest of the country. Some Auckland money obviously was pumped into houses in other regions after the impost of investor LVR rules (round 2 of the LVRs) late last year. This helped to perk those markets up and the rest of the country has been doing its best to play 'catch-up' with the largest city this year. The move from zero restriction to a 40% cap for investors in the regions might therefore be more of a stumbling block.
And it's possible that some regions might have got a bit ahead of themselves, particularly in places where there's no discernible housing shortages. So, we might see the impact of round 3 fall unevenly.
But given how quickly the effects of the Auckland-specific measures wore off (was it even as much as six months?) it would be surprising if the latest moves lasted any longer than that - if indeed they last even that long.
The Reserve Bank was clearly caught out by how relatively ineffective the second wave of LVR measures was, having got good bang for its buck from round one.
As an aside I would say, however, that the RBNZ tends to play up the effectiveness of the 2013 LVR measures while rather underplaying the surely considerable impact that the (erroneous) four hikes to the Official Cash Rate in 2014 would have had. The subsequent need of the RBNZ to back track and more on the rate rises has poured a good deal of petrol on the house market since.
LVRs - end of a love affair?
At the outset in 2013 the RBNZ stressed that the LVR measures were temporary. There was a good deal of scepticism in the marketplace that this would be the case. Subsequent events appeared to emphasise that the LVRs were here to stay.
But interestingly, more recently the Reserve Bank has again started to refer to the temporary nature of the LVRs. This suggests to me that the central bank might be feeling that the measures have, after all, reached the end of their useful life for now and just might be lifted within the next year or so. Could be wrong. Just a feeling.
Regardless of any arguments on the effectiveness of the LVRs in stifling house price rises, the measures have shored up the banks' balance sheets - which is a very good thing. According to figures collected by the RBNZ, high LVR loans (those above 80% of the value of the secured property), now account for just 12% of banks’ residential mortgage exposures, compared with about 21% (and rising rapidly) just prior to the initial introduction of LVR restrictions in 2013. In dollar terms the reduction's meant some $20 billion less of high LVR lending, which is a lot, and all helps to improve the banks' relative position in any housing downturn.
So, the LVRs have certainly served a purpose. But clearly the RBNZ is now moving on and pinning hopes on debt-to-income ratios as the next big thing.
Be prepared
Considering how badly the RBNZ was caught out by the relative failure of round 2 of LVRs, you can bet it's not going to wait too long into LVR round 3 before following up with the DTIs. It won't want to be looking into the face of more rampantly rising prices without some cover. I would be surprised if we don't have something substantive from the Reserve Bank, at least in terms of proposals, by March.
Frustratingly we don't at this point have too much clue how the DTIs will look. We'll have to see how they work in New Zealand in practice, but on the face of it, I'm a fan of the idea. You hear varying tales of how diligent banks are or aren't in checking on people's expenses when those people apply for loans. Banks of course say they are. I've talked to people who say they aren't.
A standard applied measure across the banking industry, for all that the banks might not like that, informing who can and can't be loaned to in terms of their income, can only be seen as a good thing.
Again, however, I wonder how much of a quelling impact this would truly have on house prices though. And again, I suspect as much as anything that this might be another measure that won't halt the housing juggernaut, but will at least further strengthen bank balance sheets against a potential housing downturn.
Let's not forget, of course, that the RBNZ's not there to save house buyers from themselves. Its role is ensuring the financial markets stay stable. So, anything it does to help that aim is positive - regardless of whether it has very much impact on house prices.
What would stop it?
So, on that last point, is there anything that would really stop the house price rises - other than a global shock, a rise in interest rates, or a sudden massive increase in housing supply, particularly in Auckland?
(Let's face it the first one of these could happen, the second is not likely short-term and the third won't happen.)
What we are seeing with both the latest round of LVRs and the proposed DTIs is measures very much aimed at the individual, the end user, the borrower.
I still think ultimately if you want to make a real difference, you've got to target the supplier of the money - yes the banks.
The RBNZ's raised the possibility of using 'capital overlays' - getting banks to hold more money against their mortgages.
The way in which some banks appear to have been tightening up their own credit procedures recently would suggest they are attempting to head that one off. They wouldn't like such a measure because it would dampen profitability, but I think it should be done. Make the banks hold more capital and you reduce the amount of money they have to lend.
It's all this free money at the moment on virtually non-existent interest rates that's the real fuel for the fire. Just do it, I say.
The other thing that I think would be a big help would be a clampdown on interest-only borrowing. This would clamp down on the more speculative end of housing investment and would therefore potentially improve financial stability and take some pressure off prices.
Sit them in the same boat
Now these things might appear restrictive, but the banks have shown with the LVRs that they can work round such measures and ultimately there's no room for complaints if everybody is in the same boat.
Indeed you wonder if banks wouldn't at times prefer to be told they can't do something (interest-only for example) which they might instinctively think is not actually good prudent banking practice, but which they currently do because they don't want to lose customers to the competition.
All things being equal and if there isn't a global catastrophe, my bet would be that the housing market's going to continue to climb sharply after the first quarter of next year. And I reckon the RBNZ is going to need to come back with more measures.
Anyway let's see what happens. It won't be dull.
28 Comments
If not now than when
NZ has the highest rate of real house price inflation in the world.
If this will help cannot say for (though needed as something is better than nothing), need of the hour is action by Government (Comprehensive policy from all) which at this stage is doubtful, seeing their denial and lies - Though will be forced to act and will act near to the election.
In election year if they do act, one should remember that the government is doing not for they have welfare of NZ at heart but to get vote and to come back to power to finish the unfinished agenda (If by that time have not finished) . Than one should be prepared for a referendum on name change of New Zealand.
Nice article but perhaps a little too polite. The RBNZ have so far been well behind the ball, just like the last governor, and curiously (suspiciously?) eager to recreate exactly the same problems. The suspicion is that they are effectively a captured regulator. Captured by the debt load rather than the banks, but captured none the less.
Two obvious measures that are known to work are ignored:
Firstly, the Core Funding ratio, which effectively favours deposits over wholesale money market funds. This has been very successful and the RBNZ deserve credit for it. It has significantly reduced a key vulnerability (the one that brought down Northern Rock in the UK). If something works, in the normal world, we tend to do more of it. Presumably it also works to restrain bank lending from exceeding GDP growth, but I've not heard this mentioned by the RBNZ.
Secondly, the farce (deception, lies) that surrounds the reserve requirements for residential mortgages. Instead of the current 25% x 8% (ie 2%) reserve requirement that is in place, it seems obvious that a reserve requirement should be real, not easily gamed. That is, 8% reserves should mean 8% reserves. Mark to model is mark to make believe.
RBNZ though independent agency but under government so follows government guideline and their goal. So Too Little Too Late.
Any Blame or responsibility should lie solely with John Key. Why in the first place, he was voted if he is not ready to take the responsibility that effect each and every Kiwi.
He has to go not for housing crisis but for not taking any action to address it. Even if he would have acted and failed, would have voted for him but for someone who refuses to accept and act is a No No for me.
All of this is just tinkering with the deck chairs on the Titanic. At best all they will achieve is shutting Kiwi buyers out and leave the market to the foreigners. (May be this is what the government wants; it certainly looks that way.) The Reserve bank simply is not equipped to deal with this problem and the real responsibility rests with the Government. The meaningful actions that the government needs to take in the areas of taxation, immigration, foreign investment, land supply, building material supply monopolies and efficiency have been discussed at length, but all we have had from the government is hot air and spin. They have done nothing meaningful or effective so we all have to stand by watching house production stagnate while home buyers, foreign and local investors fight it out, pushing prices ever higher in a corruptly rigged market. Their refusal to address the issues meaningfully firmly implicates this government in the corruption. They have had 8 years to act effectively so they have no excuse.
I agree Chris-M, but I would say not just the govt have done nothing meaningful - but everything they have done has inflated house prices. Increased subsidies for purchasing, increased immigration, more widely paid accommodation subsidies, locking in foreign buyer rights into trade agreements, lower interest rates, unbelievably slow process to plan for Auckland etc....
This Government has no intention of upsetting their wealthy foreign and NZ property speculators / investors (including them personally) by doing something about house prices.
John Key has more tools to deal with the uncontrolled property market than the Reserve Bank.
He will only tinker with the property market to make it look as if he is interested in controlling prices.
The only way National will do anything meaningful is if it looked like he may loose next year's election.
The Reserve Bank is only trying to do John Key's dirty work which will be ineffectual.
"May be this is what the government wants; it certainly looks that way."
Yes sometimes I wonder… In the absence of GDP growth, severe financial repression could lower New Zealand’s, (and in general the world’s) debt to GDP ratio. But, this requires people to tolerate negative rates of real interest on their savings without going out and borrowing to the hilt. That’s good for the economy but disastrous for the individual. Government and central bank communication policy (scaring people with predictions of imminent financial collapse and high interest rates) isn’t working anymore so more aggressive methods of financial repression are being implemented.. maybe?. I wonder if there will come a day when you literally can’t borrow to buy an asset even if you wanted to. I guess in Auckland we're already there.
David Hargreaves you actually do my head in with your left-wing desire to control everything.....what have any of the people using their equity ever done to you???
How would it be if a rule came in and you could only use 60% of your income?........the other 40% just has to be tucked away somewhere but the bureaucracy states you cannot use it.........or how about you can use 60% of your working day the other 40% of your working day has to be working but the benefits held up somewhere?? You do know how a pressure cooker works I hope?
If people can't borrow against their equity by the ratio set by the RBNZ then should the RBNZ pay those people interest and fees on that equity portion they are not allowing them to use?? It is dead money having equity tied up and not being able to use it!!
LVR's are actually the wrong tool to be using and some people including myself goaded them into it because we know the outcome of these actions but thought they'd wake up.......more hurt and pain to the lower income NZ'ers will be on the way........and some of you journalists need to be held accountable for promoting such bureaucratic measures!
Actually the solution is with the opposition.......they could support the RMA changes for a start off and push some of the needed reforms over the line......the fact is they do not give a rats about the lower income people and the sooner lower income people wake up to that the better. Labour and the Greens do not want to see lower income people lifting themselves out of the hole they are in......they want lower income poor people around as they are leverage....rather disgusting practice!
@notaneconomist ...Very well put ... some of us sometimes wonder if these journalists comprehend the damage they are doing by ignoring their professional responsibilities and following their political agenda .... pushing poison in the honey is becoming a career !!
It is true that any proposed DTI will completely shut of FHB and the middle class who maybe just there to purchase a house .... some of that is being done by the banks anyway !!
15% Stamp duty on Foreigners :::: Why doesn't Auckland city council impose that in AUCKLAND ?? ... it is within their power as the PM mentioned lately ---
Aren't there enough lefties in the council to vote for this important issue !! We all know that PM doesn't want to do it to avoid rocking the boat with China and the commonwealth countries ...But why doesn't the ACC do that??
The only people who are denying and hiding behind the curtain is the ACC, they have proven to cause this blunder, proven to delay the Unitary plan until shown the "Stick" and they are so dysfunctional and bureaucratic to take any responsible political action in the most property boiling city in NZ .... No Balls, and No Shame ACC !!
So tell me Justice who owns the equity? If the equity belongs to the owner of the asset then they should be able to do with it as they please..............the RBNZ does not own this equity it has no right to enforce such strict controls over something it doesn't own............and anyone who is supportive of such policies has to be aligned with the left-wing philosophy of controls over business to deliver policy objectives......it is how countries become communist beat the crap out of private business/ownership for some weird argument of public benefit........and when it doesn't deliver keep keep making up more policies until you reach the saturation point and by the time people wake up it is too late so civil war occurs. David does not have to claim he is a lefty his article does the talking for him.
If the 'equity' you are talking about is only speculative based on bubbles then you must also/ will own loses due to any change in market practice or law, or...a natural correction. IF Government or RBNZ policy and tax laws whether balanced or unbalanced down the track are found to be harming the overall economy and any real productivity, which it is! then I'm afraid any talk of 'ownership' of equity is just fantasy.
The RBNZ make the rules, Do you expect savers to suck their loses up IF the RBNZ decide to use the OBR due to a bank default...DUE to excessively risky loan and mortgage lending?
As for David being a 'lefty' ? TRY asking! That's how people who want facts do it, not wild insinuations.
Here, I'll help you. David, are you a member of the Labour Party or Greens? Just asking on behalf of the gutless.
Well .... talk about fantasy !!
"If the 'equity' you are talking about is only speculative based on bubbles then you must also/ will own loses due to any change in market practice or law, or...a natural correction"
Not sure if you are using the right words in the intended sentence because the above doesn't make any sense ....
Repeating the same words / assumptions and keep mixing issues hoping that most of the audience are illiterate and would believe any rubbish is put out there is not going to convince us !!
search the meanings of Equity,Ownership, and Assets .. oh, and "Speculative".
You might be pleasantly surprised !!
So, on that last point, is there anything that would really stop the house price rises - other than a global shock, a rise in interest rates, or a sudden massive increase in housing supply, particularly in Auckland?
Very easy:
- ban overseas buyers NOW
- mortgage for PRIMARY RESIDENCE ONLY , 50...60% deposit for investments
- no 'interest only' mortgages NOW
- heavy taxes for 3rd house onwards (like multiplication of the rates...)
- tax unoccupied houses NOW
- no tax benefits (interest deductions from rentals)
EASY AS...
The introduction of debt/income measures by the RBNZ would have to be agreed with by the government. On what grounds would this government agree to chewing off its own tail. IF DTI measures arrive in New Zealand they would simply be so watered down to be of no consequence.. Similarly the use of interest only loans always appear in bubble markets , and the access to this form of debt is mainly available to those that least need it, in a time of low interest rates.New Zealand/ Auckland is simply measuring its success by access to debt. In any substantive form the RBNZ knows that DTI and restrictions to interest only loans would crush the housing market , at best they will discuss or release a couple of papers extolling their virtues.
Can someone please enlight us as what the DTI will achieve if it was set to say 4 or 5 times income??
So in my simple math , a couple buy a house for $800k, having a deposit of 20%, their loan would be $640K, meaning payment of $3741 /m ... if the bank is generous it will allow them to buy the house IF their combined income is about $112K a year ( loan serviceability of max 40% of income) !! ... so if you put a 5 times DTI that means that the couple can only borrow $561K instead of $640K .... so I understand that that will cut a lot of FHBs and whoever have saved to buy a reasonably home out of the market ....
And please do not assume that the market will come down so these guys will be able to afford it then -- that is rubbish and everyone knows that ... So where is the benefit of the DTI ?? will it kerb demand ?? Who?
Eco Bird, It's anyone's guess but I believe DTI (unlike LVR) will have a big impact. Yes it will penalise FHB even more but it will harm investors the most because investors are typically asset rich and cashflow poor.
Example: Jo Investor has 4 rental houses worth $2 million. He has mortgages of $1.2 million (60% under the latest LVR). He will be lucky if the rent from his houses cover the interest, rates insurance and maintenance. So if a DTI of 5x came into effect he would need an income of $240'000 pa from a job outside of his investments. Not easy. For him to buy a 5th rental for $500k he will need to earn an additional $60'000 pa ($500k x 60% mortgage = $300k loan / DTI of 5 = $60k. There aren't many investors earning $300k pa
Remember investors make up 46% of buyers in Auckland.
That's why I think DTI will have a massive impact on house values and it could start a serious downturn, because not only will there be much fewer buyers but more people will want to sell. More sellers & less buyers = price depreciation
Very good .. I agree.... it will stop the fully leveraged investors who are all maxed out already, especially with banks applying serviceability at 7.55% interest rate on any future borrowing ( even if it was 100K to renovate a house or prop business) .... and that will slow down sales and push up rents and eventually reduce business expansion or investments ( because most have their houses and rentals as collaterals ) . Not to mention other ways around it like secondary mortgages etc.
Let's not forget that FHBs are about 19% of the buyers in the market , so these guys will be pushed to the side lines ....along with few high paid guys with extra cash which have ti wait another years or two to catch up and buy their investment.
What I disagree on is that house prices will not come down much as a result of that as some like to believe, ( obviously that crystal ball can be read from all angles) however, the big property magnets who buy in any market and at anytime will be having a field day collecting desperate sellers' misfortune! ... I think that the slowdown will hardly be tangible or effective until the current LVR and possible DTI expire ( and expire it will coz they are temporary measures that could not last more than 12-18 months) ... my guess is that it will expire around the next election !!
But is really ironic that the people and parties calling for DTI and harsher LVR are the same who are advocating for FHB and affordability ... to my mind they are just attacking the issue the wrong way .... they could potentially be very embarrassed when this will not work out ....
More sellers & less buyers = price depreciation ... Correct, but that didn't happen as much as people hoped in 2008-2009 when we had a major GFC and job losses etc.
The market hardly got down 10%, and picked up with a vengeance soon after ... just like 2003 - 2007 after the slowdown of 1999 - 2001.
And the equation became Less sellers & less buyers = price Stagnation
Only desperate people will sell in such markets, so sale numbers will go down and prices might stay .... unless there is an exodus ...! then that is another story
Will be interesting to see the results this summer, But if I could buy a property today, I certainly would !
I hope you have read this today: it just shows what other factors can affect supply and why just choking demand does not help the overall picture,
http://www.interest.co.nz/opinion/83521/john-tookey-reviews-impact-prod…
Mr. Key you have been warned to bring this government to bankruptcy. Investors are buying houses-> home-owners are losing ground and going for renting -> investors are not renting houses -> more people are homeless -> increase crime in the society -> government spending extra from the budget to cover housing and crimes -> shortage of government money to be spent for other basic necessities -> commodity price increases -> more money spent from budget to cover -> local and national government salary increases -> more money spent from budget to cover -> less spending on the social activities -> people's social life affected -> less productivity in the job with increase depression -> more existing and overseas investors joining the pool to invest more -. cycle continues until the state is bankrupted. All the years for national its been fantastic as a government. However, its time to step down or hand it over to somebody else who still can remember that there are civilians other than investors in this country.
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