Westpac economists are encouraged to hear the Reserve Bank talking about an exit strategy from the limits on high loan-to-value lending and say this country could become an "exception" by removing them.
RBNZ Deputy Governor Grant Spencer strongly hinted last week that the central bank would look at removing the limits, introduced in October last year, as it raised interest rates to more "normal" levels.
The RBNZ lifted the Official Cash Rate to 2.75% from 2.5% earlier this month and is expected to continue lifting rates through this year and next year.
In their weekly commentary the Westpac economists said that "if the RBNZ’s current rhetoric is to be believed" New Zealand could become an "exception" by removing the LVR limits, as there were "ominously few examples from overseas of similar restrictions ever being removed".
"We expect the housing market to slow substantially under the weight of rising interest rates, which will remain necessary because of the booming construction and primary export sectors. In such a scenario, the rationale for LVR restrictions might well disappear," they said.
The economists said there were "hints" in Spencer's speech last week that the LVR restrictions have had a bigger impact to date than the RBNZ was anticipating.
"The RBNZ’s latest estimates put the impact of LVR restrictions as equivalent to a 25-50 basis point increase in the OCR, which is a touch stronger than the Bank’s initial assessment," they said.
"One reason for the larger than expected impact might be because banks have been even more conservative on lending than the RBNZ rules require."
The limit's been set at 10%, or effectively about 15% if all exempted lending is included.
The economists said while some degree of caution by banks was understandable, given that there could be harsh penalties if banks breached the rules, the extent of the pullback in low-equity lending might have been greater than the central bank had anticipated.
"This has raised the possibility, in our minds, that if high-LVR lending remains low the RBNZ might consider relaxing the restrictions so the portion of low-LVR lending is closer to what was originally intended."
32 Comments
http://www.telegraph.co.uk/finance/comment/rogerbootle/10733345/Houses-…
Less first time buyers are borrowing colossal amounts.
This reduces the risk of them falling into negative equity or struggling to repay when interest rates increase. It also reduces the risk to our banking system.
The market has slowed and from my observations prices are starting to fall in the lower end of the market (less than about $650k). Wonderful news for first time buyers!
rjf - playing the mesiah with people's lives and interferring in their right to put a roof over their head would be a good thing in your book then.......certainly not in mine.
Individuals equity or lack of it is their business not some meddlesome bureaucrats.
Individuals ability to pay is their business and the bank that they deal with, not some bureaucrats!
The banks are exposing my hard-earned savings to these fools. The last few years have proven that regulation is important.
The government through its policy of land restriction is interferring - these are the meddlesome bureaucrats. Let us build and we won't need to borrow colossal amounts.
rjf - I can agree on the land restrictions imposed by local Government being an issue. And Central Government has failed miserably to curb local Governments activities.
Your hard-earned savings will be exposed in the event of on OBR if there is an event at the particular bank you happen to have your savings. The issue is that it doesn't matter where you invest there is risk and everyone has to find ways to manage their risk. My experience with regulation is that it always increases risk and costs it never ever lessens it.
Savings as an investment is not a very good model currently hence people prefer investment into assets such as housing as the Councils regulations which restrict supply provide a safer and more lucrative return. The RBNZ's OBR policy is just another finger in the air at people who prefer savings in their investment portfolio. Tax legislation adds another finger in the air at people who invest in savings over other asset classes.
I thnk you'll find that any exposure you have comes from legislation and regulation so cannot agree that it is "proven that regulation is important".
notaneconomist - I am careful to spread my risk. Given the modest return provided by banks, I expect them to lend my money carefully, LVR restrictions encourage them to be prudent so I'm all for it - and this is speaking as a potential first time buyer.
A properly regulated banking sector could have avoided the GFC or at least softened the blow. Some argue that if the US had kept Glass-Steagall we might have avoided the crash altogether.
Wheeler is doing the right thing. Keep LVR in place, crank up the interest rates. If it causes house prices to come down to an affordable level then great. Lets have a little bit of pain now rather than a bank threatenening disaster later.
a) They can rent so its not preventing them putting a roof over their head.
b) They are not borrowing in a vacuum, ie if they default "en mass" ie in a big credit event and severe downturn in the market, loss of job etc then I and indeed you as tax payers are at risk of having to bail the banks out and thats decades of debt.
Now I agree with the principle that we'd not interfer if possible, but that means their mis-actions could severly impact on me and that is what I object to, moral hazard.
Now if we could limit the consquence(s) to just the borrower(s) I would have little issue with your position of not interferring, but that is not the case.
regards
if they can afford colossal amounts then why shouldn't they be allowed to borrow to buy in?
banking system should wear its own risk...hopefully they know enough about banking to be responsible for their actions....
It's first quarter, prices always fall last quarter it has to do with speed of sales and employment voliatility. Student migration also seems to play a part.
The problem is the banking system doesnt bear its own risk and just listen to the depositors etc they dont want to. Now the OBR gives our Govn an option not to step in as a prop of last resort. Frankly however I think its a long stretch of the imagination to say our Govn wont be forced to step in and on our behalf (ie tax payers) keep it going at our expense....aka Ireland.
Bankers responsible? dont be silly all they care about is their bonuses.
regards
The problem is they can afford it - now -. What if interest rates climb, or they're made redundant or become ill? With so little equity in the property there's no buffer for shocks. I expect some of them assume house price inflation will create a buffer for them - but what if that stops? They're playing dice with my money and I don't like it.
you seemed to be under the impression you have something in the bank called "savings".
This is a misnomer (admittedly promoted by banks and gubbermint) what you have done is lent the bank money (at a very cheap rate of interest). Anytime you lend money to someone they're going to be playing dice with your money. That's why its called "risk"...
Given the nature of the contract you have entered into with the other party:
how much say in their investment and strategy, and how they will run their business to your expectations, does the contract explicitly state you have?
I suspect that the only input you have is to call up on your loan and seek a tighter investment elsewhere.
Makes sense: - Block First Home Buyers, & encourage unlimited non-NZ buyers to hoover up as many houses as they can. This will help Globalisation & keep money propping up house prices, inflation up a little, increase interest rates, banks securitisation up. Banks can then charge more interest. Everyone's a winner. The economy seems robust & moving forward.
NZ-ers can now rent property forever in their own country - the accommodation supplement can prop up their rental payments.
Golly gosh, why would we want kiwi's sinking their money into a house when we can make them rent off land lords (whom probably aren't kiwis) and then spend all their disposable income on flat screens, cars and holidays - This will really make our economy look like its having a ROCK STAR of a year.
... works well for me !
Havn't encountered a Kiwi company that can make a 50" flat screen as cheap as Sony can ...
... poor landlord , dear lady , she has to pay the rates & repairs , insurance ... ha ha ha !!!
The Gummster is free as a bird without all that hassle !
And given the state of much of the housing stock in NZ I don't think too many of these landlords have been doing to many repairs and maintenance GBH.......the perishable/time factor will catch some of the highly leveraged landlords out when they have to provide fit for human habitation housing.
as per normal business sustainability, the consumer has to pay the rates, insurance, repairs not the rentier. If that does not happen then the business collapses, any employees and contrctors don't get paid, and the equity is destroyed.
Unfortunately the cost of buildings and repairs is so expensive in NZ, compared to whats left after tax & interest, and Net Wage is so low it is seldom worth upgrading or repairing properties or businesses. To turn a profit, we are reaching a point where development is too expensive and the only real profit is to flog the asset until it is destroyed and toss it away. There are so few consumers that can afford to pay for what they want so only a few select suppliers receive premium rates,
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