By David Hargreaves
The latest calls by the Property Institute for first home buyers to be exempt from LVR restrictions fall into the usual category of such comments; well intended but naive and simplistic.
When the Reserve Bank introduced LVR restrictions in 2013 there was an unspoken truth. If you target people attempting to get a mortgage with a below 20% deposit then you are mostly targeting first home buyers. That's the unspoken reality.
The RBNZ's concern was that banks were starting to really ramp up their high LVR lending. Obviously the more bank customers that are highly exposed to a potential downturn in the housing market, then the bigger risk such a downturn poses to the banks and to the financial stability of the country.
The LVRs have in the past three years therefore served the useful purpose in strengthening the overall ability of banks here to withstand a sharp house market correction.
Locked out
The unintended consequence though is that first home buyers have been increasingly locked out at the expense of investors. So, we've seen the proportion of house sales going to investors rise quite sharply in that period.
Something does need to be done to give would-be first home buyers that first leg-up on to 'the housing ladder'. But it's not as simple as the likes of the Property Institute would want you to believe.
It's dangerous in the extreme to start saying that because NZ's not had a big collapse in housing values that this simply couldn't happen. I certainly believe that the RBNZ's original reasons for concern about banks' high LVR lending remain valid.
We now have of course, starting officially from next week, nationwide investor-specific LVR restrictions. Whether that will truly slow investors down and tip the playing field back toward the first home buyer I would, however, doubt.
So, what to do?
No divine right
I've always felt there's a slightly uncomfortable attitude afoot that it is some sort of divine 'right' for people to own their own home. I think that's a fundamentally wrong approach. It should be considered a privilege. But nevertheless it should be an ACHIEVABLE privilege. Stick it too far out of sight and you disenfranchise the young and face potentially substantial social problems down the track.
But I don't think that a blanket policy of saying: 'Here's a 100 per cent mortgage for you' just because you are young and doe-eyed is the right way to go either.
Going back many years I don't recall it being particularly easy to get large mortgages as a first home buyer. Certainly, when I bought my first home in Wellington in the early 1990s I did so with a just a 13% deposit. But I also remember it being a royal pain. The only bank my wife and I (despite both earning well above average wages) could get a mortgage with ultimately was the now long-since absorbed Countrywide. And they had to get head office approval. And we got the nod from the bank literally an hour before our conditional offer on the house was due to lapse...
I'm not asking for a medal. I'm just saying that nothing should be treated as a God-given right.
The most exposed
I don't accept that there's no chance the New Zealand housing market could experience a substantial fall. And I agree with the RBNZ basic case that the most exposed to such a fall would be the high LVR people - and yes, a preponderance of them would be first home buyers.
So, is there a more creative solution here - one that the Government could get involved in? The Government's mostly tried to avoid getting its hands dirty on this issue by trying to convince us that the problem can be solved by ramping up the supply of houses. Trouble is, we can all see, that is not happening fast enough.
Therefore, the issue of some sort of sustainable policy toward young people and giving them the chance, the encouragement, to buy their own home, becomes ever more crucial.
I've spoken out before over the preferential tax treatment that property investment gets in this country. It means that from an investment perspective buying houses is a 'no brainer'. If the Government was to, for example, remove the ability to claim tax deductions for property investment losses, this would tilt the balance somewhat in favour of people at least considering other investment asset classes than property.
But first homes are different.
More than an investment
While a first home is technically an investment, it's much more than that for most people. And I'm sure most first home buyers don't really think of the 'investment' perspective. It's a place to live. To create a home. To create a family. It's deeply rooted in the New Zealand psyche.
Could the tax system be used - carrot and stick fashion - for first home buyers? Would there be, for example, a way of creating a means by which those people who don't have 20% deposits could 'insure' sums of money that are borrowed above 80%. Perhaps some sort of tax deductibility that would enable these people to 'buy' insurance that effectively gives them a 20 deposit, albeit that some of that 20% will be borrowed? Just for example a couple puts up 10% deposit and then borrows another 10% which is fully insured - and paid for with a tax deduction. Then later when either the couple have repaid sufficient or the valuation of the property has risen, the insurance ends, the tax deduction ends, and on we go.
Granted, this is me thinking out loud, but If you could do something like that, something that ensures the bank still has in effect a 20% deposit, then you don't need to worry about exemptions are anything like that from LVR rules. This would be carrot-and-stick. It doesn't give anybody an assumed right. But it does give an incentive.
The upshot is the Government's got to get its thinking cap on now. It has the ability to create an environment in which the young would be encouraged to believe they can buy a house. It needs to get busy. The social cost of disengaging significant portions of the young is potentially high.
48 Comments
David Hargreaves
Can I suggest you establish unique differentiating terminology that distinguishes between domestic locally produced FHB's and fly-in cashed up recent arrivals who will also be technically classified as FHB's
I don't feel inclined to level the playing field for non-locals particularly international students who are gaming the system
In several jurisdictions the non nationals can only build new not buy existing, this has resulted in plenty of supply as per the Aussie example, possibly even excess supply in the case of their apartment market. Buying an existing home does not increase supply so can't see why you feel the need to ask that question.
Ring fencing rental losses is a lot more effective idea than a capital gains tax. Every rental property would have to be cash flow positive, limiting the amount most investors would pay for it. I know a lot of people refuse to accept that a capital gains tax won't have a large effect, but there is a lot of test cases around the world that show it hasn't been very effective. The only issue with ring fencing rental losses is that it may end up punishing renters as land lords are forced to put up their rents.
We all want a sliver bullet but every adjustment seems to have unintended consequences. Even ramping up supply means we need to let in a lot more construction skilled immigrants which puts more immediate pressure on the current housing shortage. Build houses to house builders.
I think we are missing PRIMARY RESIDENCE category. This is where you live, sleep, eat. This is where your kids are growing up. Family home that you are living in. There should be easy (ier) to purchase those for people living and working in NZ. It should be much more difficult to buy rental property number 4 or 25 - and also much more expensive. I'm really shattered seeing the the properties being snapped and left empty ... (2 on our street recently)...
People might not be so prepared to pay OTT prices for "investments" in the first place, not a bad thing, I would have thought. You can't charge just any old figure you like for rents otherwise your $500k house would be returning you $1,000 per week, which was a bit of yardstick for what rent you could charge about 25-30 years ago (double the x$100k number to arrive at the rent you could charge or more like figure out the rent you could charge then halve that for the price you'd want to pay - $100,000 property would ideally be rented at $200 pw).
So you buy a bottom of the barrel Auckland dwelling for 650k @ 10% deposit with a 25 year term?
That's $734 a week at current interest rates, week in, week out for the next 25 years. For a really crappy house. Assuming the rates stay at record lows. Wage inflation is virtually nil.
FHB don't need it made easier to take out huge mortgages. They need prices to come back to reality. End of story.
Yeah, but is it not better than being eventually hammered with an overvalued asset you paid way too much for WHEN inevitably there is a price correction? A crash WILL come most lightly due to overconfidence in market and ignorance of government, but things will get worse before this happens. You know the pyramid scheme falls over eventually. Desperation to get in at this point could lead to serious financial disasters for life. There are still many more important things in life than owning a piece of crap for $1mill just to say im on the ladder.
Yes FHBs need prices to get back to reality. At the moment property "investors" are playing on a field tilted in their favour with the wind at their back (not to mention JK). The LVR limit that the Reserve Bank is applying to "investors" can be the mechanism to level the playing field, but it needs to be set lower at a realistic level. In the current market any LVR limit greater than about 40% is still too high. Higher LVRs are not supported by rental yield. Also, lending at higher LVRs results in more credit being pushed into the market than can be supported by the elasticity of supply.
Agree... but what is the definition of an "investor", is it the mum and dad investors who own the property in their own name or family trust with 1-3 properties? or the "investor" who uses corporate entities to buy through and may have multiple entities owning 5+ properties with mortgages at all banks?
Do these LVR restrictions apply to corporate entities as well?
Corporate entities are naturally tax advantaged because they create jobs and therefore may also have the ability to offset rental losses (real losses or depreciation) against other incomes... depending of course on how good their tax and legal teams are
There is a great big "grey area" with the purchases of houses through entities that is rarely discussed, yet probably accounts for a large % of the total house sales.
The sales in the media focus are myopic i.e. FHB vs investors vs. foreign buyers etc - whatever the grey definitions represent; Yet the reality is, if you create a legal entity such as a company owned by a trust then who actually owns the property?
It could be indirectly owned/ controlled by a foreigner, local investor... who knows? and how are these entities counted in statistics?
Any sophisticated investor could seek advice and potentially use legal entities to circumvent policies targeting specific sectors and find ways to play around the rules
The problem is we get murky and unclear information which produces even murkier statistics that blur the picture even more.. I have not heard anything about how many houses are being purchases through entities other than family trusts
You want better answers then you have to start asking better questions (and lots of them) and then start getting better information to make targeted policy adjustments to achieve the desired outcome
Of course people who want to buy a home to live in are the ones who pay the price while social and systemic banking risks go up with ever higher leverage
I am not xenophobic however and believe that everyone in NZ should have the ability to own a home,
But foreign buyers (through whatever means) buying existing housing stocks does not help the supply issue and policies such as the Australian one that only allow foreign buyers to purchase new homes is a good start as it benefits both the
a) Creating a supply of new houses and
b) It creates jobs for NZers
Therefore its a win/ win all round
What is the definition of an "investor"?, to my mind it is anyone who isn’t an owner -occupier or FHB.
The LVR limit applied to “investors” (currently set at 60% as from 1/10/2016), should cover all the entities who buy existing housing for some purpose other than their primary residence, including:
- mum and dad investors who own the property in their own name ;
- family trusts;
- all corporate entities.
To give FHBs a fair go and a level playing field, the “investor” LVR limit needs to be lowered to less than 40%.
Banks can and do offer 90% mortgages to really strong applicants and the non Bank sector is there too. We see a lot and one 'problem' is that quite a few first homes buyers needing 90% cannot see why they should pay more on the rate and so simply do not proceed. Banks only offer the 4.25% for two years to those with 20% deposit or more. For 90% it's around 1% over that and with non Banks it's around 1.75%. You either want to be in the market or you don't.
Good luck Sluggy, almost any success story of a person or business has been based on other people's money, gaining a loan should not be seen as a bad thing, but as a positive thing in that you can be a landlord instead of a tenant, I am both a landlord and tenant, but to only be a tenant without any investments is just unthinkable
1. Classify foreign buyers correctly as they do overseas. Include foreign students and temp workers in all the headline foreign buyer announcements. The total is over 30% possibly 40% if you include companies and trusts with foreign beneficiaries.
2. Apply the Vancouver Tax 15% to these foreign buyers if they buy existing properties.
3. Apply the Vancouver Tax to all 2nd home purchases (of old properties) there by catching investors.
The above measures
- Decrease demand
- Increase Supply
Therefore help reduce the prices. (Ed would love your interpretation of the below article... prices still rising ? unintended consequences ? don't think so,...)
Big question: WHAT IMPACT WILL THIS HAVE ON THE NZ MARKET ?
Shame NZ doesn't have any independent investigative journalists to answer this.
http://www.bloomberg.com/news/articles/2016-09-22/foreign-buying-plumme…
per the article:
The plunge in foreign participation joins other signs of a slowdown in Canada’s most expensive property market. Vancouver home sales fell 26 percent in August from a year earlier, while the average price of a detached property declined to C$1.47 million, the lowest price since September 2015, according to the Real Estate Board of Greater Vancouver.
http://www.zerohedge.com/news/2016-09-24/foreign-buying-plummets-vancou…
per the article:
China's favorite offshore money laundering hub is officially no longer accepting its money.
According to data released by British Columbia’s Ministry of Finance on Thursday, foreign investors officially disappeared from Vancouver’s property market last month after the local government imposed a 15% surcharge to curb a record-shattering surge in home prices. Overseas buyers accounted for a paltry 0.7% of the C$6.5 billion of residential real estate purchases in August in Metro Vancouver; this represents a 96% plunge from the seven weeks prior, when foreigners were responsible for 16.5% of transactions by value.
According to the latest data overseas buyers snapped up C$2.3 billion of homes in the seven weeks before the tax was imposed, and less than C$50 million in the next four weeks. The government began collecting data on citizenship in home purchases on June 10. The ministry said auditors are checking citizenship or permanent residency declarations made by buyers and also reviewing transactions to determine if any were structured to avoid tax (spoiler alert: most of them were).
Across the province, the participation of foreigners dropped to 1.4% of transactions by value in August, from 13% in the preceding seven weeks.
In Canada they collected data on "CITIZENSHIP STATUS"
In NZ they collected data on "RESIDENT v NON RESIDENT STATUS"
This means in CANADA Foreign Students & Temp Visa Workers are both classified as FOREIGN BUYERS.
In NZ they are not.
Per LINZ these foreign buyers bought 13,500 homes which is approx. 30% of the Resident buyer total.
NZ Media need to sort this out and get our definition in line with how other nations define foreign buyers. Report the actual foreign buyers not what National would like the public to think it is based on their limited scope Resident/Non Resident definition.
http://www.bloomberg.com/news/articles/2016-09-22/foreign-buying-plumme…
"The government began collecting data on citizenship in home purchases on June 10. The ministry said auditors are checking citizenship or permanent residency declarations made by buyers and also reviewing transactions to determine if any were structured to avoid tax."
Just one thing I'd be worried about with a tax and that is, if restrictions become pretty much universal around the world, then I reckon the foreign investors will be back in force, tax and all, especially once prices have fallen enough. Really need to have a plan b,c and d and have someone working on a plan e as well.
NZ media getting serious? Come on! this is NZ where our major daily paper's website is full of infantile trash.
NZ is a nice country but our housing is horrendous and our journalism even worse....
We've become a sick society where the gulf between the haves and have nots is widening every day.
Sad.
I believe we'll see a decent correction or at least a significant slowdown in China in the next year or so. Lending in China will be clamped down upon.
That will bring down the NZ property market. Unfortunately most will suffer, but it will teach us one hell of a lesson
Yes I agree. I wasn't trying to justify inaction.
Just making the point that sometime soon a China slowdown is going to bring the party to an end, then we'll ask Tony Alexander why he said house prices would never fall in little ole NZ.
Auckland will be just like the Gold Coast post the Japanese bubble burst...there will be fire sales galore
Scared money moves violently
Where did Tony Alexander say prices would never fall?
The Japanese phenomenon was a product of the movement of money having a punt
The new Asian phenomenon is about the movement of people
The money follows to assist the physical people movement
Different circumstances.
Scared money moves violently regardless of the cost
People don't move so easily
Tony Alexander has just indicated that we have just seen the beginning.
There will be a stronger wave of Asian money into Auckland housing next year and the year after
On a probability basis I'm inclined to agree with him
There are differences but also similarities.
A Chinese slowdown could have at least two potential impacts that could affect property here:
1. Their govt clamps down on foreign investment, to try and get more domestic investment occurring
2. Chinese nationals repatriate money, by selling foreign assets, to make up for losses / loss of income domestically
I don't have quotes to hand but Alexander has frequently said house prices are only going to go one way in NZ, and it ain't down. The man has a good track record on predictions, but that doesn't mean he won't be wrong one day....
Yes I agree. I wasn't trying to justify inaction.
Just making the point that sometime soon a China slowdown is going to bring the party to an end, then we'll ask Tony Alexander why he said house prices would never fall in little ole NZ.
Auckland will be just like the Gold Coast post the Japanese bubble burst...there will be fire sales galore
I had a great uncle whose cousin was big in RE in the Gold Coast in the 80s...
My great uncle told me some horror stories in terms of what happened when the Japanese money dried up / pulled out of the Coast.
I might well be wrong but I've got a strong feeling we will see something similar in Auckland WRT Chinese investment
Today the interest payments on an $800,000 mortgage are less then they were on a $400,000 mortgage in 2007.
People all over new Zealand can now afford to pay DOUBLE the mortgage compared to previously, on exactly the same payments.
Trying to blame it all on foreign buyers, is like trying to blame the mouse while ignoring the elephant in the room.
Foreign Buyers are 30% of the buyers...when the market is tight (as it is in Vancouver) then 30% of the demand is a huge factor.
As for interest payments that is exactly the problem... yes 800k is equivalent to 400k however that's great if you could fix for 30 years at today's rate however I am sorry you cant.
So if/when the rates increase in the US (as the Fed plan to) then many naïve kiwis will get burnt. As our rates are highly correlated to the FED rates in that we borrow offshore to maintain the debt bubble in NZ.
If housing is going up at 20%pa and you put a 15% surcharge on then you're still ahead by 5%. It's way too early to draw any conclusions from Canada's surcharge.
Re first home buyers, on 1 October 2013 Government changed rules with Welcome Home Scheme (which is a government guarantee of higher risk lending targeting first home buyers) from allowing first home buyers to get in on no deposit, to requiring 10% deposit. This annnounced by John Key with a brush off comment that overseas experience has shown it's not a good idea to allow first home buyers to get in with no deposit.
What this ignores is the fact that those children of home owners and the wealthy do in fact regularly buy houses on no deposit by way of guarantees etc. This further cemented in the divide between the haves and the have nots.
But other than the deposit gap here are some interesting figures re affordability.
2016
$1million house
$200,000 deposit
$800,000 loan @ 4.2%
Payments $903 per week
COST principle and interest over 30 years $1,408,369
Median household income $1,575 week?
2007 last peak
$576,563 house ??
$115,312 deposit
$461,250 loan @ 9.6%
Payments $903 per week
COST principle and interest over 30 years $1,408,369
Median household income $1,258 week
Vancouver tax 15% would reduce demand so as we see in vancouver house prices would actually drop....
So you are dreaming to think prices would go up by 20% when a 15% tax is applied.... especially from the level houses are at the moment
Vancouver tax on existing homes
Decrease demand
Increases supply (as new houses exempt)
Reduces or stabilises house prices
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