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By Bernard Hickey
Labour and the Greens have come out all guns blazing in an attempt to pin the blame for any restrictions on high loan to value ratio (LVR) mortgages on the government and win over the sympathy of first home buying voters.
Both have accused the National-led Government of allowing the Reserve Bank to 'lock out' first home buyers from buying a house. Both have called for exemptions for first home buyers and for the government to intervene to over-rule the Reserve Bank.
Labour Housing Spokesman Phil Twyford and Finance Spokesman David Parker said Key's handling of the Reserve Bank's macroprudential policy tool was incompetent and was "set to deny thousands of Kiwis a shot at their first home."
“John Key has completely mishandled the lending limits plan from the very beginning. His negligence has handed the Reserve Bank a loaded gun of lending limits. He can't now fake surprise that it is about to pull the trigger,” said Twyford.
“In May National caved in to the pressure, signing a Memorandum of Understanding with the Reserve Bank that would allow it to restrict high value mortgages. As usual John Key took a once-over-lightly approach and didn’t realise the ramifications for first home buyers," he said.
“It wasn’t until a month later that Mr Key realised what he had done. He then tried to negotiate through the media to put pressure on Reserve Bank Governor Graeme Wheeler. But the primary purpose of the Reserve Bank is to be independent and not listen to political pressure."
Labour said in government it would give first home buyers an 'interim exemption from the 'speed limit' on high LVR lending while it built 100,000 homes in 10 years and imposed a capital gains tax on second homes and rental properties.
Green Party co-leader Russel Norman said first home buyers should have more lenient LVRs than property investors.
“LVRs should be more lenient for first home buyers than for property investors. It would be unfair to require large deposits from first home buyers. They’re not the ones forcing up houses prices - speculators are," Norman said.
“It’s very concerning that John Key doesn’t seem to be fighting for first home buyers and is standing by while the Reserve Bank moves to lock many of them out of buying a home. LVRs are a good move but they should be targeted at property investors and speculators, not at families trying to buy a home, and they shouldn’t be the only tool."
The Green Party has also backed a Capital Gains Tax, excluding the family home, restrictions on non-resident purchases of residential property and a government-led programme of house building.
29 Comments
What the politicians don't seem to understand is that if first home buyers are exempted from the proposed LVR policy it basically defeats the purpose of it in the first place. The idea is to reduce risk in the financial system and whether we like it or not, highly leveraged first home buyers represent the highest risk group.
Once again, politicians are overriding any sound reasoning with the fear of vote losses.
For once we have the makings of a great Reserve Bank Governor.
Well he might wish to address the distortions that are imposed upon the foreign exchange swap markets by allowing the locally incorporated banks to lend 140% of local deposits.
Excess foreign wholesale loans are currency swapped back into NZDs to affect hedged borrowing - unfortunately recent Bank of Japan and US Federal Reserve actions have resulted in a massive upward revaluation of the USD leg of many currency pairs, including our own.
Currency swap related mark-to-market collateral transfers have resulted in our banks reaching USD currency exposure limits, hence creating an unwillingness to sell NZD which would further expose them to USD. The NZ leg of the FX O/N NZD/USD swap rate has moved to 3.38% as a consequence. This places negative cost pressure on those wishing to sell the NZD/USD currency pair to foster higher NZD export receipts.
Not at all - they swapped borrowed USD to collateralise the receipt of NZD under the terms of the currency swap. That collateral is worth more now and hence the NZD source counterparty has to return the excess to our banks. But as explained to me they are nearing their USD exposure limits in terms of USD deposits in New York banks and are now reluctant to engage in the acquisition of more USD assets when conducting foreign ecchange trades on behalf of customers. Hence they make it expensive to roll short NZD/USD positions. Just one of the unfortunate side effects of relying on such significant foreign wholesale borrowing relative to the size of the country, in volatile times.
The RBNZ is battling to soak up the USD with further excursions into the currency swap market by offering collateralised printed NZD to the banks at one end of the spectrum and soaking up the local liquidity excess by engaging in another collateralised operation - ie repo. They are taking these NZD back in return for NZ goverrnment stock. All rather farcical, except the arbitrage is profitable for the RBNZ.
Unfortunately Deputy Governor Spencer decreed that the release of currency swap trades must be delayed by months. D10, Section 10
Stephen,
I am I think with iconoclast in suspecting that what you are saying is important, but not fully understanding it. Up to you; but if you have the time to take this back to first principles and explain the money flow from start to finish, then that would be informative to me in any case.
Its not a sign of wellness....
Shows the system is run to red line (lending v local deposits) meaning other bits of gear may fall off (exporter gets a dud rate to bring funds back to $NZ, with the bank telling him, our fantastic mortgage business is restricting our corporate FX business)...
Other shocks (yet not seen) will so to deliver unexpected impacts.... As the system settings are in "our" control (the gov), the impacts will be from our (his) own hand or seen as an own goal.... - nothing to do with the bankies, they will tell us...
So with the system run to red line, means we are not safe as houses....
Henry you are not wrong. The RBNZ @ current levels of nz government securities ownership has limited facility to absorb the banks' excessive USD exposure by initiating additional currency swaps while simultaneously sterilising the NZD liquidity injections utilising repo drains - that is RBNZ taking in banks' excess cash in return for giving up nz government stock to them. Today it was NZD 1.0 billion when they demanded NZD 2.3 billion. Tomorrow NZD 3-4 billion? Who knows? Certainly not the vulnerable unrewarded depositor.
The RBNZ ran down the government securities collateral in favour of holding foreign currency swap related assets to back the currency in circulation.
In Colorado, farmers are being paid a bounty to shoot the buggers down
I don't need outside help. Notably, the US armed forces keep seeking the company of my misery.
Russel Norman is being opportunistic on so many levels its ridiculous
Firstly its not John Key's fault that the Auckland housing market is overheated.
Secondly , the Reserve Bank is an independant body not unlike the Crown , its not a political football , they have to do what is right not bowing to pollys
It will distort the market if any group of buyers get special dispensation to be exempt from the rules , which will have uninteded consequences . The price of lower priced houses bought by first timers will skyrocket even more
Labour and the Greens will never be able to acquire 100,000 sections and build 100,000 houses , the Government is broke already and the only way to do this is to tax and spend, .... it aint going to happen.
This is not Norway with natural gas and offshore oilfields providing the royalites , taxes and funds to build houses for everyone, although ...........ah the Greens have stopped that one from happening .
Its utopian to think the Government can build a house for every person to own and the Greens are being delusional in their ideological fairyland ....and thats apart from the fact we dont have enough artisans to keep up with current demand and a host of other logistical issues , including restrictions on land supply in Auckland
All I can say is what second rate vote buyers....if they bothered to understand the economics they'd know full well the ever increasing leverage from first time buyers is the krux of the problem causing the bubble.
Seems they are as intent on driving us into a depression as National, if not more so.
Good for Mr Wheeler, at least someone appreas to understand and act.
regards
In my view Labour and the Greens are correct. So is Mr Wheeler, in doing the job according to the brief that Key and English have given him- to maintain bank stability, and inflation at 1-3%. Labour and the Greens are saying they would change the brief. Mr Wheeler seems sensible enough to work to such an amended brief, if it were made.
There are almost certainly two categories of house buyers who are using very high LVRs. New home buyers (because they have little choice); and multiple property buy to let landlords. Many of the BTL landlords as I understand it use virtually 100% loans, financed by rents, and with the collective equity of previous purchases as collateral. Nothing particularly wrong with that, they are providing a useful service. Except in a low interest environment, (and where government funded housing supplements give them a back stop) they will be the marginal effect that will lift prices beyond anything affordable for new home buyers, and where the financial stability of the whole system is threatened. Take them out, or at least reduce their LVR limits, and price pressures would almost certainly ease.
And new home buyers would have affordable houses even at high LVRs.
IF the RBNZ decide to go ahead with this plan, then I would suggest that any/all savings of the people who want a first home will take their money from the major street banks elsewhere. Maybe to a Building Society who are not 'registered' banks and don't have to follow any RBNZ rules. Those BS's that don't have their own funds with one of the major banks of course
As a collective........depositors withdrawing on mass can bring down this corrupt system.
Savers and depositors are being made the scapegoats of a disastrous decade of RBNZ bubble creating. For historical notes, those bubbles they help create are:
1: The NZ house price/property bubble via following the Greenspan Plan, and
2: The overvalued NZD based on all that ridiculous debt lending.
LVR's are like moving the deck chairs on the Titanic
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