A Reserve Bank announcement on some sort of loan-to-value constraint on housing sector lending "may be only days away", BNZ head of research Stephen Toplis says.
In a commentary looking at the speech on Thursday by RBNZ Governor Graeme Wheeler, Toplis said that the central bank was "in a complete bind".
"In short it is faced with choosing between allowing the housing market to overheat spectacularly, threatening widespread inflation and raising the risks to the banking sector of a future correction, or encouraging the [New Zealand dollar] to head for the stars in turn undermining the rebalance that New Zealand so desperately needs and severely compromising our future potential growth rate."
Toplis said the RBNZ had, in consultation with Government, rushed through the required process to get its so-called macro-prudential policy tools up and running at "a breakneck pace".
The four tools include the potential for the Reserve Bank to introduce restrictions on the share of high loan-to-value ratio (LVR) residential mortgages being made by banks. See all our stories on macro-prudential tools here.
Toplis said the speed at which the RBNZ has moved to get the tools up and running was a clear signal that it was keen to utilise them as soon as possible.
The latest speech by Wheeler had reinforced that desire in preparing markets, and the populace, for a near term announcement on prudential policy measures.
"...It looks like the Bank is ready and willing to throw the kitchen sink at the perceived problem.
"We have long argued that it looked likely that the RBNZ would impose some form of loan-to-value constraint on housing lending before year’s end. Today’s speech indicates that an announcement on this may be only days away. But, in addition, Governor Wheeler specifically noted that 'capital and liquidity overlays can help build up buffers in the banking system' intimating that something may well be afoot on this front as well."
Toplis said he understood entirely "where the RBNZ is coming from in this regard".
"In particular, we are very wary that speculators may be re-entering the market, particularly in Auckland and that this behaviour needs to be curbed. Be that as it may, what these prudential policy measures will do, in the very words of the central bank, is 'reduce the actual supply of mortgage lending'.
"The question is: if the limited supply of new houses is the primary source of house price inflation, as we suspect, what are the longer term implications of potentially further reducing that supply via credit rationing?
"There is no doubt lending restrictions will, at least in the first instance, assist the primary objective of bank balance sheet stabilisation, it’s the externalities that concern us. This is not to suggest that we know what will happen but rather to highlight that such policy measures should be considered experimental, with the New Zealand populace the lab rats in the experiment," Toplis said.
He said that as an aside, the BNZ was concerned with recent anecdotal evidence that people are using their Kiwisaver funds to enter the housing market and, in turn, taking advantage of a significant government-funded top up.
"We would recommend some urgent analysis on this development so that we might find out its extent, its impact on the housing market, its impact on household savings and the magnitude of the Government’s contribution."
Toplis said he thought Wheeler's speech "was a great effort at trying to pull together all the threads of a difficult situation".
It reflected, Toplis said, the complexity of the environment and the many dilemmas that the Reserve Bank faces.
"We understand the approach that the RBNZ is taking but we are sceptical that the housing market will settle down until such time that the RBNZ is some way through an active tightening in monetary policy. Accordingly, we remain of the view that process will begin in the first quarter of the New Year."
26 Comments
All you property followers might be interested in this.
New Zealand is the 4th most overvalued property market in the world according to the OECD; reported in the Telegraph.
with the imminent application of LVR restrictions, the obvious effect will be only those who are a more cashed up will be able to participate in the housing market - on the face of it's a good thing (lower credit risk etc.), but who are the cashed up people likely to be:
1. first home buyers with a longer savings record
2. current home owners sellng up or selling down
3. landlord investors
4. foreign buyers
Once LVR restrictions are in place, there will be a significant lag for first home buyers to save for the higher deposit, so there will be a period where a reasonable number of participans in the market will be excluded - no doubt to the benefit of those classed in 2, 3 and 4 above.
Is that fair ?
Will LVR restrictions just end up being a short-term delaying tactic? Eventually the same number of participants will come back to the market.
What you describe as "Vested interests" is well over half the population. As of the 2001 census only 30% of people were renting thier home. many of the people who have just struggled thier way into the market over the past few years as first home buyers would also come under your juistiction of "Vested Interests" and they would be wiped out by your proposed quick correction.
I don't nessesarily disagree with your proposed policies, but don't pretend this is simple or easy to fix. Any kind of fast drop in house prices will cause major economic damage to the majority of NZ families, so dont try and flip it off as nasty investors and banks getting thier just deserts.
Correct
What you describe is known as "moral hazard" or "deadly embrace" or the "deadly handshake" or the "dance of the tarantula" or the "dog-knot". Where a price correction of 10% can wipe out the equity of anyone who has only 5% equity in their home. Moral Hazard is a new phenomenon that arose in 2006. While it is a social problem for society as a whole, it is a destructive problem for young (local) first-time home owners. The question is how do you fix the problem? Do you ignore it? No it doesnt go away. Do you inflate the problem away? No, because the cost of entry is postponed and becomes harder and the hazard continues. Do you deflate?. Well that is probably the only solution. But you would need to "bail out" all at-risk first home owners with a government guarantee that protects the equity of young "first-home-owners". Where do you get the cash funding for that government guarantee? You need to impose an entry fee of say $50,000 on all migrants who buy any property over $400,000 and so it goes on. There is any number of ways of funding the guarantee. Like an EQC fund but paid into only by "migrants" (new migrants will benefit from deflated prices - the idea is to transfer that benefit to the first-home owner)
Otherwise government is locked into a deadly embrace of making sure prices never deflate
High LVR's is not something that has been in place for last 10 years or so.
When I first started Lending (mid 1980's) Trading Banks would go to max of 75% LVR, then in came Solicitors Nominees companies / Building Societies / Friendly Societies would would lend on second mortageg rates (higher) and terms (shorter like max of 10 years). So total LVR of 90% across a number of lenders was not uncommon.
Countrywide and other Bankers in early 1990 lent to 90% using Mortgage Indemnity Insurance to underwrite exposure in excess of 75%.
LVR's is potentially one of the tools to use but can't be used in isolation:
Reduction long term interest rates over last 10 years is another.
Reduced supply of land (land is a high portion of a build then it was 20+ years ago.
Increase average size of homes.
Increased immgration.
Build cost in excess of CPI.
Taxation policies.
The list could go on.
As John Bolton (Squirrel Mortgages) points out, it is capital controls that would have the greater effect and be more desirable. LVR controls are a blunt instrument.
Capital controls could be used to influence interest rates on high LVR loans, loans to foreign investors, etc
wierd.....""In short it is faced with choosing between allowing the housing market to overheat spectacularly, threatening widespread inflation"
You cant have inflation if ppl cant pay, I would have thought the last 5 years would have shown that.
Obviously still stiuck in the Austrian time warp.......
regards
On LVR caps, it's worth keeping in mind what the RBNZ has outlined as its preferred approach. These are so-called "speed limits" and "tiered limits", not an outright limit, per se.
"A ‘speed limit’ would limit the share of new high-LVR lending to the residential property sector that can be undertaken above a given LVR threshold. For example, only 10% of new residential property lending might be permitted (by a bank) with an LVR above 90%."
"Tiered limits" may also be used.
"For example, only 10% of new residential property lending might be permitted with an LVR above 85%, only 5% of new residential property lending might be permitted with an LVR above 90%, and zero new residential property lending permitted with an LVR above 100%."
http://www.interest.co.nz/bonds/64524/rbnz-chooses-speed-limits-and-tie…
Do we any data for what the %s are now however?
From what Ive read the suggestion is 80% is the neutral LVR so anything above that or below that even by small amounts (1 or 2%) has a big impact due to leverage. Since we seem to have 95% and 30 years as not unusual that suggests getting back to the nominal 80% without imploding the housing market could be difficult and could take a decade.
A tighrope comes to mind.
regards
There are figures in here on the recent growth of high LVR lending across the big five banks - http://www.interest.co.nz/property/64685/anz-records-strongest-march-qu…
And a detailed look at the big five banks' positions here - http://www.interest.co.nz/property/63262/big-5-banks-combined-post-nz33…
The real story is National is in panic mode...one year before election.
RBNZ has a gun on their head....unless house demand and prices fall within the next 12 months, National chances are toast......
Isn't it suprising that suddenly RBNZ is so enthusiastic about LVR while all the previous ocassion they keep denying it has any effect?? (Although correct in their assesment that LVR do not have long term effect in housing demand, they do have a SHORT TERM in reducing demand, enough for National to score some goals before the election )
LVR restrictions are not about affecting realestate pricing, they're about affecting financial stability.
The RB has no direct interest in lowering demand for or increasing supply of housing. It's interest lies in ensuring the banks (being the core of our economy) are stable, and one way of doing that is by regulating a minimum amount of equity home buyers have when they purchase - thus lowering the risk of banks being adversely affected by mortgage defaults.
More Reserve Bank jawboning. Central Banks are printing like no tomorrow worldwide with an almost zero chance to "remove the punchbowl", and we think the RBNZ can tweak here and pull a lever there and all will be well.
ZIRP is a financial confiscation on a scale never seen with no end game in sight. Interest rates are totally divorced from reality and the free market pricing mechanism.
Exchange rate manipulation is the order of the day.
How can any of us price anything these days? So gambling is the name of the game....not genuine thoughtful risk assessment.
Cheers
In a word...Yup...Roelof, he is showing the signs of exposure concerns, undoubtedly with good reason. add to that he's thinking there may be some vonuntary backing off by the Industry as a collective for commonsense reasons......mmmmmgood luck with that, .
But hey ,it's like saying please with some menace ....so it's a start.
agree Roelof. yes my comment was from the realestate market point of view and not national financial stability point of view.
As others have pointed out , the RBNZ is not concerned directly with the participants or pricing in the realestate market, only it's potential negative effect on the banking system if things move in the wrong direction.
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