'A lot of people' are now sitting on low-priced houses they can't sell because of the Reserve Bank's 'speed limits' on high loan-to-value lending, according to long-time property investor Olly Newland.
Newland, who's also an Authorised Financial Adviser and author, told interest.co.nz that warnings he had made in an interview late last year that the LVR limits, introduced in October, might cause the property market to become dysfunctional, were coming true.
"...The market is becoming dysfunctional. Expensive houses are selling, very quickly, therefore skewing the statistics that prices are rising, and a lot of people are sitting on the very cheap houses and can’t move them.
"I have clients now who are sitting on cheaper houses and they can’t sell them. They can’t get out of them. Especially those who have been doing them up and reselling because the buyers have disappeared and the poorer buyers with small deposits haven’t got the ways and means to find Mickey Mouse ways of getting around it."
The LVR limits were introduced by the RBNZ principally to ensure financial stability, as the central bank was worried about the possibility of our banks becoming badly exposed to any sudden sharp fall in housing values. However, the secondary intention of the LVR rule was to attempt to remove some steam from the then rapidly heating housing market, particularly in Auckland. See here for articles on LVRs.
Recent housing figures have shown that house price growth has slowed somewhat, but that sales volumes have slowed markedly - particularly in the lower price brackets - as would-be first home buyers have retreated from the market believing they won't be able to attract the 20% deposit that many of them would now need.
“I think first home buyers should be exempt [from the LVR limits], whether it is a new house or a second hand house. It should be exempt altogether," Newland said.
"First home buyers should be exempt if you want to keep the [LVR rule] in place – it should be disbanded totally in my view, but if you have to have some sort of control it should be perhaps 10% deposit. I think that would be fair. Ten percent deposit in my view would be plenty to ask for. Twenty percent is too much for the average worker."
Newland said the developments in the housing market subsequent to introduction of the LVR limits were "not surprising at all".
"It is like an interest rate rise in a way. It pushes people out of the market at the low end, it doesn’t bother the people at the high end – to a wealthier person it’s just another bottle of wine and another cup of coffee a week. Whether they have to pay more interest or less interest or they go and get a second mortgage or a third mortgage...it just doesn’t matter. But for working class people it does matter."
The RBNZ last week kicked off what's expected to be a series of interest rate rises with a 25 basis point lift in the Official Cash Rate to 2.75% from 2.5%.
In an article also last week Newland suggested the interest rate rises prompted by the RBNZ would soon be "yesterday's fish and chip paper".
Amplifying on those comments in the interview, Newland said the change from the RBNZ had been "very minor".
"It hardly tinkles the teacups.
"[But] what I find very difficult to understand is why these constant threats about more increases.
Why rate rises?
"We seem to be the only western country that has interest rates where they are now let alone where they might be, under threat. And I think it’s very damaging and will sap some confidence out of the market, which it doesn’t need.
"Don’t forget interest rates don’t just affect property they affect businesses as well. It affects the whole community.
"Our interest rates are crazily high. If you compare our normal interest rates with other countries' normal interest rates, for some reason New Zealand, as long as I’ve been in the business, has interest rates which are twice as high as any other country. Most interest rates in normal times are four or five percent but for some reason we seem to think 8,9,10% is normal – and this is crazy and I don’t know why that is," Newland said.
He reiterated his view that the country will now see a renewal of mortgage wars between the banks as they compete for business.
"It’s happening already. Straight after the announcement of the OCR rise banks immediately started putting their rates up, and only today they are starting to come out with specials again and cutting their rates.
Mortgage war
"So I think what’s happening is that high interest rates will encourage people to leave money in the bank. High interest rates will encourage people not to borrow as much, so the banks will be flush with more money than ever and so they have to lend or go broke so I think we will have a mortgage war coming up before long..."
Newland said he thought the housing market should have been left to "find its own level".
"The prices of property have risen to the level they probably need to.
"And I think the market should gently flatten off and have small increases of a few percent per annum, which is the way the capitalist system works. I think the major rises may be behind us but if interest rates go up they’ll be passed on and they’ll end up as costs and push prices up again because we still have immigration, we still have pressure on housing, we still have people coming to the country from overseas, we have all the same pressures as before," he said.
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