By Bernard Hickey
Tension is growing between the Reserve Bank and the Government about how proposed 'speed limits' on growth of high Loan to Value Ratio (LVR) mortgages might affect first home buyers.
Prime Minister John Key was adamant on Thursday that the Reserve Bank measures would not hit first home buyers too hard, while Reserve Bank Governor was equally adamant that first home buyers would have to be included within the speed limits to have the desired effect.
"I've discussed the matter at length with the Reserve Bank Governor, including last night, and I'm convinced we can navigate a way through which means that the banks have less loans which are more leveraged, but continue to make sure there's opportunities for first home buyers to have higher degrees of leverage," Key told reporters in Wellington.
He was speaking after Wheeler reiterated the bank was considering 'speed limits' on the growth of high LVR loans. The Governor stood firm in a news conference after the bank's June quarter Montary Policy Statement against suggestions first home buyers be 'carved out' or exempted from the limits, as they have been in other countries.
It was clear at a subsequent select committee hearing the issue of first home buyers continuing to have access to high LVR loans is heating up as a political topic, with National Government MP John Hayes questioning the development of the LVR speed limts.
Key pointed to other countries that have carved out first home buyers and said he was talking with the Reserve Bank to ensure first home buyers still had opportunities to borrow with low deposits.
"I for one would not support a situation where first home buyers are completely locked out of the market," Key said.
"The people we're wanting to get into the market are first home buyers," he said.
Key was then asked if first home buyers would be 'carved out' or exempted from the speed limits.
"I'm not sure absolutely that there'll be a carve-out, but I think the banks will have flexibility on how many of those loans are of a higher leverage nature, and making sure that first home buyers are part of that group is going to be important," Key said.
"There's a balance to be had here. I’m pretty confident between the commercial incentives of the banks, and the judgment of the Reserve Bank, and the influence of the Government, we'll be able to navigate a way where they stay in the game."
Earlier Wheeler said the bank had to include first home buyers in its planned speed limits because they made up about a third of high LVR lending, which itself made up a third of all new lending.
Wheeler pointed to how other central banks, including those in Israel, Norway, Sweden and Korea, had introduced more absolute high LVR limits with 'carve-outs' for first home buyers. The Reserve Bank was, instead, looking to limit the overall growth of high LVR lending to a certain percentage through speed limits that applied to all high LVR lending, rather than just for investor or second and third home buyers.
"If you look at what many countries have done, they've carved out exemptions for first home buyers, but then put absolute constraints/limits on all other high LV lending. The thing we looking at, given that first home buyers are roughly 30% of the market for new mortgages, is whether we should bring in speed limits," Wheeler said.
He was asked directly if the Reserve Bank would carve out or protect first home buyers.
"Carving that out would be a big exemption in terms of mortgage pressures. We haven't made up our mind at this point. We're out consulting with banks. First home buyers are a very significant part of the market and the Auckland market is experiencing very rapid house price appreciation," Wheeler said.
23 Comments
Wow, highly leveraged first time buyers are much of the problem....so, lets cutout that bit so we dont lose votes...so problem uh not solved.
It will be intersting to hear what labour and the greens have to say on this one. Will we see some spine and leadership, or will they follow blob man above....I think I can see how this one goes.
Pretty obvious from this that JK isnt in this to make good decisions on NZ's future, just get re-elected at any cost IMHO.
regards
Agreed Steven.
While their ability to affoard a home in the short term will be worse, in the long term it will be improved.
With highly leveraged panic buying occuring in the market they are putting prices up for themselves. Prices actually might decrease if you took them out of the market. Then they'd ease and wouldn't have to be as highly leveraged.
And they are being protected if they aren't allowed to buy into the bubble! Bubbles burst - and prices always rise quickly just before the peak. Then pop...
What is a 'first home buyer' when the dust settles!...what if one partner has owned a property before...what if both owned one or more overseas...what if they still do....How many ways can buyers become 'first home buyers' when clearly they are not or were not???? And who gets to be the gatekeeper!
The PM then went on to add "to honour our commitments to first home buyers, we will also take steps to remove the generous landlord tax subsidies coupled with freedom from any capital gains tax which have enabled baby boomers to corner the property market and squeeze the young people of NZ into a perennial rental situation."
lol
So this is a 'brighter future'??
We can't work out how to increase NZ inc. income, we can't work out how to increase workers income, we tried selling our mineral wealth (you didn't want that), we're selling off some state assets but that's been going a bit slower than we'd hoped.
Solution, we'll let the young generation leverage themselves up to the hilt and all hope for the best....
LVR restrictions would achieve very little and would most likely distort the market further – rich get richer situation! Here are some scenarios: 1) If you have say a couple in their late 40's to late 50's that are buying an investment property/properties then they most likely have a family home that, if not mortgage free, will have perhaps less than 50% mortgage over it. They can actually buy several properties as LVR will be calculated over security for all the properties combined. So LVR restrictions are not going to impact on this group of buyers.2) Young people with wealthy parents will assist the kids by supplying the deposit or say the additional 10% they may need and simply provide a guarantee to the bank. Parents are out there in big numbers assisting kids into homes even now! 3) The impact of Kiwi Saver being used to purchase a house will become more prevalent as individuals/first home buyers use that avenue to assist with the deposit. 4) Developers and housing companies will use self funding for a portion of deposits and/or credit backs for the buyer completing some of the work themselves. 5) Migrants will not be impacted by LVR restrictions as they are not borrowing to the same degree as the local Kiwi. 6) If a sector ie first home buyers were shut out by LVR restrictions then rents would increase significantly. 7) Rent to Buy will make a comeback. 8)The mere suggestion of an 80% limit has in itself lead to a flurry of real estate activity as buyers who have 5% to 10% deposit panic to buy now as it would take years for them to save another 15% or 10% and especially tough when rents would rise at the same time. There will be NO market fiddling this side of the election – the Reserve Bank tools are all talk and scaremongering and it's not going to happen. House price rises are not in the CPI calculations – only rents. Reserve Bank has no need to fear inflation over the next 5 years and if anything they need to slash the OCR.
Really whats the problem - Wheeler says house prices will increase 14% - a first home buyer pays $500,000 for an Auckland house deposit $50,000 ie loan $450,000. in 12 months time house worth $570,000 loan $450,000 - now has 21% equity. Even with a 5% deposit there will be more than 20% equity after two years. Key knows LVR restrictions will be an election loser and will see more of our young head overseas. Imagine what LVR restrictions on first home buyers would do to house prices in provincial towns and the smaller cities where first home buyers make up more likely 50% of transactions.
As I repeatedly point out: “Home ownership” policy that does not address the supply of houses at affordable prices, is never actually “home ownership” policy at all. It is “finance sector profit maximising” policy and “property speculator profit maximising” policy. All that happens is that house prices inflate by at least as much as the additional credit made available to first home buyers by relaxed LVR's. A small minority of very quick buyers might have been advantaged, but everyone else from then on to the end of time is worse off.
John Key is showing his true colours in the worst possible light. He looks more and more like a stooge of the “big finance” sector in which he gained all his pre-politics experience.
Tough LVR’s are actually doing prospective first home buyers a big favour, even if they don’t see it that way. They are like a fence in front of a cliff – “hey, that fence is an unfair obstruction, Jeb Corliss throws himself off cliffs all the time, why can’t I…..”?
From "The Unconventional Economist" in Australia this morning:
"....New Zealand’s housing affordability problem is mostly a land affordability problem. As shown below, lot prices have surged over the past decade (particularly in Auckland, where planning restrictions are tightest), with land prices also making-up a bigger proportion of overall dwelling values......If the Prime Minister was truly concerned about the welfare of New Zealand FHBs, he would seek to reduce speculative demand in the marketplace via a combinations of taxation reforms (e.g. abolishing negative gearing, implementing capital gains taxes on investment properties, implementing a broad-based land tax, and restricting foreign purchases), whilst also re-doubling efforts to reform New Zealand’s restrictive planning system, free-up land supply, and boost infrastructure spending.
High LVR borrowing is a symptom of the above policy failures, not the root cause of (or solution to) New Zealand’s housing woes....."
http://www.macrobusiness.com.au/2013/06/tensions-build-over-rbnz-lvr-limits/#comments
Actually that is not strictly true. CGT may have slowed it, but it is still stupidly big growth.
CGT is not to slow house prices, just that all income is taxed and ther are no advantages of one investment over another. There are still other loop holes to fix though.
Agree on long term investors 0- they are less of a problem than those that are in for a quick profit and pay no tax.
"I've discussed the matter at length with the Reserve Bank Governor, including last night, and I'm convinced we can navigate a way through which means that the banks have less loans which are more leveraged, but continue to make sure there's opportunities for first home buyers to have higher degrees of leverage," Key told reporters in Wellington.
So much for the Reserve Bank Act of 1989 and so called central bank independence - Key has certainly shredded that veil. The law in this land does not carry the authority it used to, but nevertheless still deserves to get - this National Party mob has bombed it along with democracy back to the Stone Age.
Stephen, I've been surprised at the forceful nature of Key's comments on two or three occassions over recent months about how bad the impact of an OCR rise would be on the economy. And nor does he want to see LVR restrictions. One of the reasons why I'll be surprised if the RBNZ does actually implement them.
This is absolutely the WORST thing the government can do. I know it may be a bit hard for first time buyers for a while, but the market needs to come down to meet the realities of what people can (or should) realistically be able to afford.
And for the people here encouring this sort of behaviour by feigning concern for first time buyers, you are fooling no one. Keeping these absurd leveraging ratios is encouraging people to take on stupid amounts of debt to satisfy your greed, nothing more.
PS I am a home owner and would gladly take a hit in home equity if it meant we got some reality from this housing madness. And it's not just an Auckland problem, housing is overpriced everywhere in NZ.
John Key is talking like he has no intention of allowing house prices to fall. In other words no intention of reinstating affordable housing, and popping our over-inflated market.
Where the hell is National really at? Is all this accord fiasco just a show to passify people like me who want to see action, whilst knowing that nothing real will come of it in the end? I'm afraid this John Key guy is just full of it. Or confused.
Or maybe he's working for insider mates who helped him make his fortune via insider trading...or something? Who knows!!
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