By Bernard Hickey
The Reserve Bank of New Zealand has detailed in its half yearly Financial Stability Report (FSR) that it is seeing early signs that its high LVR speed limit is changing market behavior.
But it said it was still too early to say if the limit on mortgages with a Loan to Value Ratio (LVR) of over 80% was working to reduce the over-valuation of New Zealand's housing market and therefore reduce risks in the banking system.
"The early evidence shows that banks have significantly reduced high LVR lending approvals, while increasing the cost of high LVR loans," Governor Graeme Wheeler said in releasing the FSR.
"However, it is too early to assess the impact of the measures on house price inflation," Wheeler said.
However, the bank did say in its report that there was little evidence to suggest a material amount of housing activity had been brought forward before the policy took effect on October 1. It also pointed to the BNZ REINZ survey from early October showing declining housing market activity, with fewer people visiting open homes and lower auction clearance rates.
The bank said there would be a degree of market volatility over the next few months. "It will not be until property market activity settles down in a few months time that a clear view of the impact of the restrictions will emerge," it said.
The bank reiterated throughout its report that New Zealand's housing market was over-valued and vulnerable to a correction, even more than it was after the 2002-08 boom.
"If unchecked, further near-term growth in house prices increases the likelihood of a disruptive adjustment in the housing market," the bank said. It reiterated that the high LVR speed limit was a temporary measure that depended on the bank's assessment of its effectiveness in dampening housing-related credit growth and house price inflation.
"These restrictions will be removed once there is evidence that significant imbalances in the housing market have abated, and the Reserve Bank is satisfied that their removal will not ignite housing-related credit growth and house price inflation," it said.
It did not detail the thresholds for when it viewed the imbalances as having abated. It warned again that the Reserve Bank expected to increase the Official Cash Rate by 2% "from 2014 to the beginning of 2016."
The bank repeated that it did not expect the high LVR policy to materially inhibit new house building, but that it was gathering data on new house building to assess its effectiveness. "The Reserve Bank may also remove the restrictions if the speed limits are not achieving the stated objective of reducing systemic risk, or if the distortions that arise from the restrictions outweigh the benefits."
News conference
Later in the news conference Wheeler again downplayed the impact of the high LVR policy on new building, but left open the option of an exemption. He said high LVR loans for new home builds had been about NZ$60-80 million a month or just 2-3% of new mortgage lending.
"While there might be some immediate impact, we expect the demand for new housing to remain strong," Wheeler said.
Later when asked about the Reserve Bank's thresholds for deciding when to end the high LVR policy, Deputy Governor Grant Spencer said the bank was looking at a variety of evidence.
"We don't have a red line or well defined thresholds," he said.
Also when asked about the Reserve Bank's approach to using interest rates to control asset bubbles, Spencer pointed to the bank's Policy Targets Agreement, which gives scope for the bank to take asset values into account.
"There might be situations where Monetary Policy does need to take account of leaning against a housing cycle," he said, emphasing that the bank would only lean against any bubble, rather than burst it.
Elsewhere, the Reserve Bank's Head of Macro-Financial, Bernard Hodgetts, said the bank had yet to receive data from the banks about how their high LVR lending was tracking within the new speed limit framework. Hodgetts said banks may actually be above the 10% limit in the first month or two as they worked off pre-approvals.
"It will be March before we can reasonably assess how the system is travelling relative to the speed limit," he said.
Also, Spencer said the bank did not see reductions in mortgage rates for sub-80% borrowers in recent weeks as a defacto easing of monetary policy.
"Overall bank margins are normal," he said.
(Updated with comments from news conference and attachment to statements)
57 Comments
First Home Buyers should thank Wheeler eventually. They will get a chance to pick up affordably-priced houses after the crash.
In fact this will help the crash not to be so severe.
The more of them who have bought already, mortgaged up to the eyeballs, the worse the crash will be. For them as well as everybody else.
Wheeler is a good man.
I totally agree Phil - why so many criticise a man who know what he plans to do with interest rates, has the research to show what it will do to house prices etc, and then goes and protects the most vulnerable, generally young new first time house buyers, eludes me. Yes I understand they're young and have expectations but sometimes more experienced heads have to protect against that enthusiasm. Wheeler wil be a saver of many young people from getting a very bad start in life.
Disagree. I reckon in 2 years time they will be cursing him as they pay their Chinese landlord rent on a house they could have purchsed in 2013 without the LVR, but is now out of reach (although they still won't want to buy the $280K sprawl starter fringe HP dream house in Weymouth that's slowly losing value because they want to live somewhere with some amenity).
Weymouth is losing value?
Define what you mean by "amenity" please? in terms of weymouth maybe? dunno the place.
"Affordable place to live" is a pretty good amenity to me.
Not close to the "right" schools and cafes, well tough, it sounds like too many ppl are un-realistic in their expectations and forget whats essential and whats nice to have.
regards
Yes - when REINZ used to break down their figures by suburb up to a few months ago the cheap fringe parts of Auckland were not matching inflation (at the same time as central areas were rocketing up).
Clendon Park and Weymouth are exactly the sub $300K freestanding sprawl housing that some advocate as the solution to all affordability problems. But if people already aren't buying them why will the suddenly want to if there's a whole stack more built?
I don't think people are unreasonable for wanting to live somewhere where there's easy access to cafes, shops, schools and no need to run a family fleet of cars for every trip out of the house. People already have the choice of living somewhere like Clendon Park if they want a cheap freestanding sprawl housing. Why can't they choose to compromise on the lawn, car fleet and size and get something in a better location if they so choose?
2nd para, yes there are a lot of Qs around the supposition being put forward so vocally by some.
Im not sure whats really happening with the central areas, looking at various other capitals/countries it would seem that the expensive areas in each are all climbing in price significantly. Its almost like there is a global glut of cheap cash "foreigners" are tapping into to gamble on house price inflation giving them a big return....not sure at all. If thats the case then the bust as they rush out could be truely gigantic.
"unreasonable" well I suppose it depends. We bought in the best area we could afford while it met the criteria of good public transport and local shops, so we compromised a a bit and live with it. eg wWe didnt get a big enough or flat enough section but we simply couldnt afford the $50k extra asked for that.
regards
I don't think they are activly betting on house prices to make money (there's much more to be made where they come from surely). Suspect a lot of it is about getting wealth away from the clutch of dubuious administrations to places where it's more safe - like here.
No I dont think so (a mistake). I'd say its intrinisic in the argument that the concern is the FHB who has an excessively high LVR mortgage, they could effect NZ bank stability. Those who pay cash or have a small mortgage take the loss on the chin without causing a NZ bank or the NZ Govn an issue, so no issue.
Also I'd wonder how many cash buyers are FHBs (or really are ie had a property in say the UK and sold it, bringing the cash back), a small % of the total I'd suspect, got a %?
regards
Steven
It might be semantics, but these are important distinctions
A First Home Buyer in New Zealand can be one of the following
(a) Local domestic young couple just setting out on their own with no help
(b) Local domestic young couple just setting out with family assistance
(c) Cashed-up recent migrant
(d) Recent migrant with cheap offshore borrowing
(e) A princeling with loads of loot to hide
(f) An overseas investor buying their first investment
Then there is the distinction between
(aa) A young local domestic intending FHB who has yet to get over the line, and
(bb) A young local domestic FHB who has actually got over the line
I suggest the number of b+c+d+e+f equal or potentially outweigh "a", more than you realise
Actually no I suspect not.
Do you have some actual %s though? You write as if you do.
(a) is the worry.
(d), (e) (f) Anybody else is in effect a cash buyer and takes the loss on the chin and doesnt significantly effect NZ's banking stability as there is no local debt.
b) Yes OK, no idea what %. They probably odnt have a high LVR so no bearing on stability, otherwise they are (a) really.
c) recent migrants, I know a few, all of them have no $s as a deposit, so I query the %.
Please dont suggest, prove....
Otherwise your position has no foundation.
Finally the leverage factor means that about 10% of high LVRs going under water a decent % is enough to send banks technically insolvent.
So even if what you suggest is say (a) is 50/50 split to the rest (and I'll contend that that is questionable) 50% is quite probably still big enough to do it.
regards
That's an important distinction. If the pupose of the LVR restriction is to protect stability of banking system surely a good thing? If the purpose is to reduce price houses (or to protect the banking system by reducing house prices) it's not - it will likely reduce supply pushing up prices.
Which is it?
I agree that the LVR ratios are a good policy, they will stabilize the market and the banks.
Your advice/comment that first home buyers wait for a 'crash' is terrible advice. The likelihood of a fall in prices, or even a plateau in prices in the Auckland market is highly unlikely. Based on past behavior, which is a good indication of future behavior, we're likely to see a further 50% increase in prices in Auckland over the next 2 - 3 years.
There are no changes to the systemic issues that are causing prices to go up.
http://www.stuff.co.nz/business/money/9394361/No-stopping-house-prices
There was the commentator Nicolas Arrand 3-4 years ago who sold his house, rented and posted about how prices were about to plunge "Why would anyone want to buy when the market is going to fall! It's much cheaper to pay 5% extra rent for a year than lose 5% on the purchase price of your own home. That's why the renters...are staying..renters. It's yet another piece in the jigsaw puzzle of falling house prices."
Maybe that's the crash? Wonder how much he made buying back his central Auckland property at the post-crash price?
There is a reporter on this site, sold his Auckland house about 2 years ago to avoid the imminent 'crash'. Wonder how much extra he would have to pay to buy it back at today's prices?
"Wonder how much he made buying back his central Auckland property at the post-crash price?".... property values in the quality, central Auckland suburbs dipped around 10% in the 2008 recession, after a approx 120% increase in the preceeding 5 years, some suburbs prices only flattened.
The Politicians and Bureaucrats have snookered themselves in all directions.......they can't bring house prices down and they can't stop house prices rising.
NZ and the NZ bureaucrats have been completely unprepared for globalisation.
NZ will not have affordable housing as defined by Hugh when so many factors work against affordable housing.
The LVR's are silly experimental policy and just making people rack up more debt to put a roof over their head. It is called mortgage slavery via Policy and legislation.
IRD, Councils, RBNZ, Immigration NZ, are the key contributors to price rises and I have missed a few of this list.
There are other Government organisations which directly affect pricing to the upwards side.
No they are not snookered
They may not be able to bring house prices down
But there are any number of things they can do that will put a cap on price pressures
Whether they have the political will to do them is a different question
Its more a question of will or won't versus can or can't
We can but pray that he is a good man, that he knows what he is doing, what the out come will be, what the incomes will be and if he is worth his weight in gold.
Or maybe we should just keep digging bigger holes and wells in our fair land and pray for rich tourists to like our destinations, inspite of buying a leaky home as a bolt hole from their own mess.
Or perhaps we need more West Coast miners to keep us on track to build the monorail at cheap interest rates borrowed from the hard earned savers, who are all ready copping the flack, paying over the odds to get a raw deal in bailing out this and other fair lands, but not fair practices.
When is fair play, not fair play, it is when you steal from the saver to pay the culprits, aided and abetted by the biggest Wheeler Dealers in recorded history.
The gambit is to make us all feel wealthy, by printing and papering over the cracks in the economy, created by spending tomorrows debt, today.
So Fractional Banking can keep the turnstiles flowing.
It is called borrowing till you drop, borrowing for an appreciated asset, borrowing on the never never.
And those that keep doing it, keep getting bailed out. It is the kiwi way. It is also the UK and USA way. Japan is a past master, but the scope was to think bigger.
Bigger houses, bigger tax take for the fools, bigger deductions for the new masters, bigger deals for the landed gentry, wheeler and dealing.
However, you do need a good accountant, a good liar, a good lawyer, a friendly bloke in the Reserve Bank and a few good mates in the Aussie Banks, especially if a first home buyer.
A friendly Government policy is essential. as is an inflated expectation.
Equitable, nah, just equity. At least 20%. Then compound the problem, over and over.
Nudge nudge wink, wink.
Cannot keep a good man down, especially when paying him 600K plus for the help.
I agree whole-heartedly with Phil and Grant A. Easy credit for house mortgage will simply lead to property bubble. NZ is not the only country (and definitely not the first!) to implement mortgage lending restriction of 80%. As for first home owners woes...it is not unique to NZ either! In the long run house prices will adjust to more realistic level which is good for everybody (except those who had borrowed up to their eyeballs to live beyond their means...)
"the role of monetary policy to control asset bubbles "...
The Reserve Bank wants to allow credit growth thru low interest rates..BUT...at the same time it wants to prevent Asset bubbles..
I don't really think it is possible to do.... They can try to control credit growth in a particular sector...BUT... the reality is that once credit enters an economy...it "flows" and it can end up anywhere.
One mans debt is another mans income...
If we have overall credit growth of 6%... then ( all things being equal)... Real estate values will likely go up by 6%.
Add in the Global liquidity and foreign buying and it seems unlikely that Real Estate prices will be that affected by the LVRs'.... in my view.
You only have to look at our cuzins over the ditch, Melbourne in particular, either climb on board or join the 1000's of renters with their Chinese landlords. I've seen the quality of the homes that are selling in excess on 1.5m, our property has not even started to catch up to super city prices.
I think LVR and Interest rates alone wont be sufficient to control the housing madness that prevails in NZ and other countries, however such measures should be part of bigger package. many well informed commentators here have highlighted the role of supply side constraints ,council regualtions/levies, tax incentive/disincentives and role of migration , hot overseas money and foreign buyers , all or at least some of such factors need some follow up action, but is there is political will to act?
hot overseas money and foreign buyers , all or at least some of such factors need some follow up action, but is there is political will to act?
Probably not and the wall of printed money coming out of the US and Japan might multiply when Australia joins the quantitative easing game.
DC noted : In Australia, their new prime minister has conceded that AU Govt debt will surge higher, past AU$400 bln as they prepare to raise their debt ceiling to AU$500 bln.
We expect the RBA to cut further – to as low as 1% in the event of a recession – and it may need to undertake a ‘Down Under QE’.
Given the relatively small size of the Australian bond market (and the fact that almost threequarters of the Commonwealth bonds on issue are currently held offshore), any ‘Down Under QE’ would probably need to encompass a broader range of assets than Australian Government bonds
I completely agree, Nomad, I am one of those who have been banging on about these things for years. I have also suspected that MP's reluctance to tackle the problem is due to most of them owning investment properties themselves.
The sheer shamelessness of the political elite classes serving themselves and their mates in big finance, is breathtaking; no inflation in house prices is too much it seems; it is just a "new norm". Never mind if there is a historic house price median multiple norm of around 3, and it went to a new norm of 6+ by 2007, and is heading to a new norm of 9+ now thanks to international specufesting piling into Anglo property markets.
We need to throw everything in the book at this, but total abolition of urban growth constraints is the one essential, accompanied by more free market methods of financing infrastructure for growth. Targeted land taxes would be the next item on my program. Also changes to banks capital holding requirements surrounding mortgage exposure.
I wouldn't ban overseas investment, I'd just make it a source of revenue with fees on it, and if housing supply was attended to, overseas investment would just make things better for renters.
Plan B... that is pretty much my view....
If you double the Money supply.... it will have an affect on the purchasing power of mopney.
Real Estate reflects this much better than either CPI or Wage inflation.
At some point the Reserve Bank will realize that inflation targeting may not be the best way to manage the..." store of value " aspect of money...
If the property mkt develops into a "fullblown" bubble ...maybe they will review things and see the limitations of Inflation targeting..?? ( eg. aligning credit growth with GDP growth..etc..etc.)
A full blown bubble and the Reserve Banks inability to manage it will also show the limitations of Domestic Monetary policy when an economy is "open" to the full forces of Global Capital.
Interest in housing might, in a wider sense, be quite a good thing.
In China today they are running an enormous experiment by attempting to replicate western capitalism - but without the property rights that feature so largely in the west. Quite a lot of water to go under the bridge before we get an outcome, but the result will be illuminating.
I heard some comment on the radio that RBNZare still considering an exemption for New Builds from the LVR restrictions and that seems to be reflected in this piece by Wheeler.
In the end the answer to house price inflation has to be more houses built at lower prices. The rapid increase in building costs and the demise of the finance companies bank rolling developers together with restriction on land supply has forced up the cost of new homes and underpinned the value of existing ones.
One way to increase house supply will be to provide an exemption to new builds from the LVR exemptions thus making it easier for developers to sell homes off the plan and thereby finance their developments.The trick will be to ensure these homes are not overpriced. Moves the government is making on materials costs and cooperation with local government on land availability should help.
It is a bit unusual for the RBNZ governor to be running housing policy but once he has started to interfere as he has with the LVR restrictions he might as well be in boots and all and try and achieve something.
Ok Justice, bet on and yes I am aware of the past record and spend every day trying to assess when a move will be made as it impacts a lot of things. But whilst it's definitely not certain, I can only see a major offshore shock from wherever (US, Europe, Japan) as being the only thing that will stop it in 2014 (you've got to give me earthquakes as well since the RBNZ was apparently meant to have forecast that as well?). But if we get none of those, first half of 2014 highly likely, much the Key's disappointment I suspect.
All the best with your efforts to predict when a move will be made GrantA. I suspect however, that should you attempt to create an equation to do this you would need a seriously big blackboard. So many variables on the left hand side that long before you get to "=date" you would have the Luddites on here talking earnestly about peak chalk.
Your time would probably be equally well spent trying to pick the winner of next years Melbourne Cup.
I very much agree with you Snodgrass. There are a huge number of variables to consider, and how they pan out, or don't, and what timeline and order in which they do, makes it a huge guessing game. I have little faith in such forecasts for that reason, but am still prepared to have a bet like the one with Justice with both of us frankly knowing either could be right.
Why forecast then at all, well for me it's more a case of trying to evaluate the risks involved and manage that - at the moment my bet is as I've made it but I have my back covered if I'm wrong. The attitude that worries me most is of those that want to talk themselves into believing that there can be no possibility of a rate hike next year and are in no position to handle it should they be wrong.
Keep firmly in your mind Grant that the RBNZ introduced the LVR scheme because they desperately did not want to move the OCR..........up. This will continue for a while yet. They also do not want to encourage higher currency speculation regarding the NZD which raising the OCR will do........the catch 22 scenario we saw pre 2008
Yes agreed Justice, that's certainly part of the reason (I.e. It doesn't want a higher Kiwi), but it has been quite open and vocal that the main reason is its financial stability KPI. It wants to protect the banks (and therefore indirectly the economy) from a housing crash and Wheeler has had experience of that whilst at the IMF when the US one was triggered. There is no doubt in my mind, and having listened to many of his and Spencer's speeches that should the KIwi correct back towards the TWI equivalent of mid-low 0.7000's, and looked like staying there, the RBNZ would have started a modest hiking cycle by about now.
But currently the chances of a Kiwi getting to such levels will be almost solely dependent upon the US starting its QE tapering program and getting the USD higher, and that's the problem. Whilst the markets are now speculating again that could come in Dec on the back of the last non-farm payroll number, I'd really question that - in fact whilst they might even do some small token amounts, I really doubt their ability to taper for a very very long time (that's what should be really worrying us all because you don't keep printing $1Tln and not expect it to eventually become a massive problem for inflation and interest rates somewhere down the track (2-5 yrs?)
So on the basis of no material taper, a continuing well supported Kiwi, we won't get OCR hikes until well into next yr (probably Q2 best quess) when the RBNZ has had time to correctly assess that LVRs along won't do the full job for them (as their own OCR forecasts suggest). We've already had the CPI jump unexpectedly (I.e. By more than they had forecast) from 0.9% to 1.40% in the last qtr, and with 2% their target, they will have work to do to slow that rise with the likes of Chch and the housing building program still to really get a head of steam, but clearly in the case of Chch on track to do so.
A global shock or an earthquake could change all that, but I for one wouldn't be risking my house, farm or business by relying upon one - the man or women who can forecast that will obviously be already the world's rich man (yet to meet him/her though).
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