By Alex Tarrant
The government appears comfortable with the Reserve Bank's new tool kit to control property lending and is not planning to introduce more extensive Canadian-style controls which place limitations on borrowers with loan-to-value ratios (LVRs) above 80%.
Finance Minister Bill English was asked at the National Party's annual conference over the weekend whether limits like those in Canada were needed in New Zealand to avert another housing bubble.
English said the government already had the tools in place to deal with any future resurgence in household lending growth, which was currently "very small" (see chart below).
“I think we have all learnt form the last cycle, we don’t want to let the banks get carried away with large growth in lending. We have the tools to limit their ability to do that and those tools are in place and can be used when required," English said.
Those tools include giving the Reserve Bank power to set limits on loan-to-value ratios; tighten (or loosen) banks' core funding ratio requirements, which stipulate how much core funding banks must source from domestic and long-term sources; and introduce counter-cyclical capital buffers where banks might be required to hold more capital in times of a credit boom in efforts to dampen the credit cycle.
Read more here, where NZIER principal economist Shamubeel Eaqub told interest.co.nz the tools would need to be used together to be effective. Massey University banking lecturer Claire Matthews also said LVR controls could only be held in place for a matter of months before borrowers and lenders looked to find ways around them.
Canadians tighten
In June, Canadian Finance Minister Jim Flaherty announced new rules for Canadians with government-backed insured mortgages with loan-to-value ratios of more than 80%. Homeowners with LVRs under 80% would not be affected.
The Canadian Department of Finance outlined the changes on its website:
- Reduce the maximum amortization period to 25 years from 30 years. This will reduce the total interest payments Canadian families make on their mortgages, helping them build up equity in their homes more quickly and pay off their mortgages sooner. The maximum amortization period was set at 35 years in 2008 and further reduced to 30 years in 2011.
- Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes. This will promote saving through home ownership and encourage homeowners to prudently manage borrowings against their homes.
- Fix the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent. This will better protect Canadian households that may be vulnerable to economic shocks or an increase in interest rates.
- Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.
Read a more detailed Q&A on the Canadian moves here.
Westpac wonders
Last week Westpac economists said it should not be ruled out that the Reserve Bank might move to control LVRs to cool down a recovering housing market next year.
"New Zealand could start looking a lot like Canada and Norway, where housing markets are frothy but the central banks are keeping interest rates low due to subdued consumer price inflation and high exchange rates," Westpac chief economist Dominick Stephens said.
"Canada recently resorted to unconventional tools to try to cool the housing market, including maximum amortisation periods for mortgages, loan-to-value limits on equity drawdowns, and requirements for borrowers to demonstrate that housing costs are no more than 39% of income," Stephens said.
"Is it possible that New Zealand could invoke similar unconventional tightening measures to cool an overheating housing market next year? We would not rule that out," he said.
No chart with that title exists.
27 Comments
So no ideas what to do?
Typical BE obfuscation.
No thoughts on controlling where immigrants can live.
No thoughts on curtailing non-resident and non-citizen purchases/ownership. Forcing immediate sales by this group would immediately cure the problem.
The Greens need to use Social Media to tell it the way it is and gather a voting block for 2014. A bit like the Obama campaign in 2008. They could also use Obama failings to plan on how not to squander the benefits they gain from such actions. There is a huge reservoir of non-voters who just happen to be the same actual or potential victims of the present inequality.
Why not Labour? Stupid question.
I'm a social conservative so would certainly struggle to vote for the greens. But on housing they are bang on as regards removing the demand pressures (ie foreign investment, neg gearing etc), however they are way off regarding the supply side (ie restriction of urban boundaries). In balance I woudl vote for them if it meant getting traction in removing the demand side pressures, especially as I dont have confidence in Nat / labour addressing supply issues.
Without getting into the issue of social engineering, and if accommodation supplement and other assistance was to become regional, outside of auckland only, (introduced over a few years) how many non-working beneficiaries would relocate out of auckland to other parts. There are excellent schools and hospitals and other amenities in places like Tokoroa, Hamilton, and places around Rotorua and Taupo. Special exemption could be allowed for disability beneficiaries and others who are (largely) dependent on their families for living assistance. ie transport, hospitals etc. Apart from closeness to family there must be many living in auckland who could easily relocate.
I saw Bill answering this question on The Nation this Sunday and he also made the point that because the Government backs the banks (I'm not sure if he meant implicitly or explicitly through the deposit insurance scheme) the Government has to make sure that they remain profitable. This all screams moral hazard to me and the suspicion that Bill is worried about the future value of his and voters' significant property and farm investments.
Good point. I didn't see the programme, but would have thought that we need the banks to be solvent; it's their problem whether they are profitable, which is a different thing.
I don't personally begrudge them a reasonable profit for managing our financial plumbing, or even a reasonable return on their capital. Whether they have loaned wisely; or whether they have say exchange rate risks, though, really should be their problem.
We cannot keep shafting New Zealand- as scored by the current account- with a doomed economic paradigm just to ensure $3 billion in profits, not just revenues, goes to Australian bank shareholders (ironically including me)every year.
On the subject raised in the title of this article, we cannot compare ourselves to Canada. If our interest rtaes were the same as in Canada housing would be affordable to all. My sister lives in Canada and last year she fixed her mortgage at 2.1% for 5 years. At that rate housing here becomes affordable for all. The floating rate is 3%. We always refer to housing affordability as the price of houses. In fact the largest component of housing affordability is the interest cost.
If we want to compare ourselves to Canada (in this instance) perhaps we should be demanding the banks reduce their (ever increasing and record breaking in spite of a worldwide crisis) profits and offer these interest rates here!
Affordability is affordability. Either it's affordable or it isn't. The average 5 year rate here is 3 times what my sister is paying. Yet the average house costs about the same (although they are in a bubble according to media reports so prices there may drop : ).
She took out a 15 year mortgage and is paying half what I am on a 25 year mortgage and her house was more expensive than mine.
Interest on my mortgage will work out at more than double the price I paid for my house!!
Interest on her mortgage is less than 50% the price she paid for her house.
So what makes housing here less affordable?? The interest the banks charge. Simple.
By your logic, if the interest rate dropped to zero, housing would be infinitely affordable by all, regardless of the asking price. If the interest rate was zero, but an average house cost 2.4 million dollars, would you still consider it affordable? Until you've stopped paying your mortgage, you're still basically renting off the bank remember.
Also consider how much house we get for our dollar. Little rotting, draughty wooden boxes here compared to warm, cosy, solidly-built homes overseas.
Also take into account that while our house prices are largely similar, our average salary in NZ is around $43,000. In Canada it works out to about NZ$60,000... so their market is less overblown than ours, despite the fact that they're in a bubble themselves.
My argument is affordability should be based on all costs associated with owning a house. Interest is the largest cost in owning a house. Yet we all focus on the house prices.
We say land bankers should sell land at lower prices ( some argue they should be forced to). We say developers should create subdivisions and houses for less money. We say house prices are over valued and should fall. We argue local councils charge too much for subdividing land. Well I say the banks are creaming it. And their bottom line profits prove it.
My house isn't a " Little rotting, draughty wooden boxes here compared to warm, cosy, solidly-built homes overseas." . It is insulated, double glazed, solid and warm. But that isn't the point. Let's look at it from another angle. The cost of building a house can only be reduced by cutting corners (and producing inferior product like say leaky buildings) or reducing the developers' margins. Developers cannot get funding unless their margins justify the risk of lending. They need healthy margins or they don't get funding. So lets's reduce the cost of land. How? Unless we start nationalizing (maybe become communist while we are at it) how can we force landowners to sell? We can't. We can dream about it and talk about it but we all know once we move down that path things get very very dark indeed.
So how about reducing interest rates? Please tell me what is wrong with lower interest rates. If loan to value ratios are controlled we can't borrow over the top unless we have the deposit. If restrictions are put in place as they are in Canada lower rates won't heat up the market. They will simply allow more people to own their homes instead of renting them.
If the interest rates were even lower, people would simply borrow more, pushing up the price of houses further. People will always stretch to pay the most they can in an effort to get the nicest home. The banks' lending criteria works in the same way. We'd actually have even more debt.
Well if you look at the USA they have an OCR of 0.25% and debt I think not quite as high as us.....
Japan?
If you look at NZ debt in 2006~2007 what was the OCR then? 10%?
External debt,
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt
So on the face of it I cant see any correlation what so ever.
regards
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