By Gareth Vaughan
Reserve Bank of New Zealand deputy governor and head of financial stability Grant Spencer will give a speech today on housing amid growing expectations the RBNZ will introduce further lending restrictions to address financial stability concerns stemming from the buoyant Auckland housing market.
Spencer will make a speech about housing at the Rotorua Chamber of Commerce at 12.30pm today.
"Given the topic and Spencer’s role, it is possible that a further announcement on financial stability is made in the speech," ASB senior economist Chris Tennent-Brown says.
On March 5 the RBNZ issued a consultation paper on three options to carve out loans to residential property investors as a new asset class for banks. The potential is that the RBNZ move could make loans more expensive for property investors, and potentially harder for them to obtain, given banks may have to hold more capital against such lending than they currently do.
The new treatment of lending to property investors is partly to facilitate the introduction of a macro-prudential property investor policy should that become necessary, the Reserve Bank said. RBNZ governor Graeme Wheeler last month said bank lending to investors was running at about 35% of residential mortgage lending nationwide, and about 40% in Auckland.
The three possible alternatives the RBNZ said were under consideration were:
· if the mortgaged property is not owner-occupied; or
· if servicing of the mortgage loan is primarily reliant on rental income (with the threshold likely to be 50%); or
· if servicing of the mortgage loan is at all reliant on rental income.
Consultation with banks over the proposals closed on April 7.
The RBNZ's next bi-annual Financial Stability Report is due out on May 13, which is another opportunity for the prudential regulator to spell out any plans to tackle the overheating Auckland housing market.
Back to the toolbox?
As long ago as February Finance Minister Bill English hinted the RBNZ may look to introduce another so-called macro-prudential tool to try and rein in the hot Auckland housing market. (The residential property loan move isn't considered a macro-prudential tool). English, alongside Treasury, must be kept in the loop on any such Reserve Bank plans.
Any new macro-prudential tool would come on top of the October 2013 introduction of "speed limits" on banks' high loan-to-value ratio (LVRs) residential mortgages. This means banks must restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the dollar value of their new housing lending flows.
The new tool economists seem to think the RBNZ is most likely to introduce is a debt-to-income restriction, perhaps along the lines of the one introduced by the Bank of England last year. In the UK no more than 15% of any lender's total number of new residential mortgages can be greater than 4.5 times the borrower's income.
Auckland Stratified Index up 20%
Spencer's speech comes a day after the latest Real Estate Institute of New Zealand monthly sales figures - for March - show fresh national and Auckland median price records, and the strongest sales volumes in any month since May 2007.
In the red hot Auckland market the March median sales price of $720,000 smashed the previous record high by $42,000, or 6.2%. The Auckland median price rose 13% in the year to March, and 11% in the three months to March. And the REINZ Stratified Housing Price Index, which adjusts for some of the variations in the mix that can affect the median price, shows a 20% annual rise in its Auckland Index.
Although the national median price was up $35,000, or 8%, to $475,000 in the March year, when the Auckland effect is stripped out the national median was up just 1.4% year-on-year.
The national Stratified Index, meanwhile, was up 9.5% year-on-year to a record high, and March's 8,803 sales is the highest monthly sales in a March since 2007, and the highest since 9,285 in May 2007. There were 10,989 sales in March 2007.
At $8.8 billion, the value of residential properties sold in March was a new record, smashing the previous high by $590 million, REINZ said.
'Early sign of broadening beyond Auckland'
"March is typically the strongest month of year for housing activity, but even taking this seasonality into account, the pickup in activity over the month was stellar," Tennent-Brown says.
"March housing data confirmed that the strength in the housing market is showing no signs of waning. If anything, the pressure in the housing market is lifting, and within the latest data showing an early sign of broadening beyond the Auckland-cantered theme of the past year."
"Saying that, the Auckland housing market is by far the most stretched region from an affordability perspective. We expect price appreciation in Auckland will continue this year, as strong population growth, low mortgage rates, and tight supply all play their part in this market, which represents around 39% of nationwide sales," says Tennent-Brown.
"The RBNZ has cited concerns around the lift in Auckland house price inflation, largely from a financial stability point of view, with potential for inflation spill over a secondary, but still important, concern."
"We expect the RBNZ will implement further lending restrictions to help manage the potential financial stability issues associated with the buoyant housing market. We (also) expect the RBNZ will leave the high-LVR lending restrictions in place until at least late 2015," says Tennent-Brown.
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27 Comments
To solve the cash buyer problem, maybe a whacking with a stamp duty stick @ 10% of sale price, 50% exemption if you present your passport, 100% exemption for passport and you live there for minimum 12 months. So any company, trust, speculator or non citizen pays an upfront premium. Serves many purposes. It appears as a discount to local owner occupiers, can be altered and would allow tracking and reporting of all property transfers.
It should include and be payable for properties held as assets when companies are transferred as well to prevent the avoidance as the property appears to remain in the same ownership but company is sold.
To discourage landbanking a hefty annual development deposit payable @ a multiple of rateable value, either used to offset development costs or forfeit on unimproved sale.
It's the same the whole world over and shows there is no real effective answer:
http://www.cnbc.com/id/102583153
While still on the matter i was dining at a simple restuarant last night and the youthful waiter seemed in high spirits. When asked why he was so happy he replied that he had just bought his first house for investment purposes and I should get in quick and he would tell me how.
When a waiter tells me how to invest in property then it's time to get out.
The MSM are leading your waiter right up to the edge of the cliff. I watched the house do up programme on telly last night; so misleading with the massive profits that were supposedly made. They conveniantly forgot to account for tens of thousands of freebies the contestants received in cash and products. Just the selling/advertising/auctioneer should have taken $30,000 or more out of the "profits"
Have these people no shame?
Good on the families for getting stuck in and achieving what they did though.
Simple answer Big Daddy. The question is where do you want the wealth of society to accumulate. The current set up in the English speaking world results in it accumulating in the capital value of housing and commercial property, as you have accurately figured out. In Germany, it accumulates in the hands of the Mittelstatt, and in China it ends up in the pockets of the ruling class. The BIS has a paper on this.
The solution to a more productive society is better allocation of capital. My suggestion is
1. Put interest rates up 1-2%.
2 Cut company tax to 12%.
The effect should be that profits get invested into productive uses rather than into overpriced housing and banker's bonuses. Profitable businesses such as Google will set up shop here and happily hand over 12% rather than 0.001% or whatever it is at present, as well as paying high wages.
Is that likely to happen? No, stick with the rental business.
The new tool economists seem to think the RBNZ is most likely to introduce is a debt-to-income restriction, perhaps along the lines of the one introduced by the Bank of England last year. In the UK no more than 15% of any lender's total number of new residential mortgages can be greater than 4.5 times the borrower's income.
Made me wonder how the banks would cope if this ratio were to apply to existing residential mortgages.
The bankers are the tools I'm afraid. When I bought my first house the rules were two and a half times my salary (no allowance for wife's earnings) and 25% deposit paid off over 15 years. The reason house prices have gone up is because banks lend more. No wonder they make so much money.
China is in trouble can thye have aa controled landing or Chaos?
The risk is that assets in China collapse and the Chinese investors all decide to leave at once to take advantage of opportunities in China.
One way or the other this mess is going to come to a head.
http://davidstockmanscontracorner.com/komatsu-construction-equipment-or…
The Federal Reserve may be putting off raising interest rates from near zero, but the days of cheap money for everyone in credit markets have already come and gone.
The amount of outstanding distressed bonds -- those that investors consider most likely to default -- has more than doubled in the past year to $121 billion, according to Bank of America Merrill Lynch index data. Prices on the debt have tumbled 2.6 percent in 2015, the biggest decline for the period since the 2008 credit crisis.
Much of this has to do with oil prices that have fallen by half from last year’s peak, devastating junk-rated energy companies that had been piling on record amounts of debt. Even though central banks across the globe are still embarking on unprecedented stimulus measures, sending bond yields to new lows, investors don’t think that will be enough to stop defaults from spreading.
“When oil drops from 100 to 40 bucks a barrel, there’s no amount of QE that’s going to make up for that,” said Bonnie Baha, who helps manage $73 billion at DoubleLine Capital in Los Angeles, referring to quantitative easing, or central-bank bond purchases. “People are waiting for that buying opportunity but nobody wants to catch a falling knife right now.”
http://www.bloomberg.com/news/articles/2015-04-14/swelling-distressed-b…
In the heady days of the commodity boom, oil-rich nations accumulated billions of dollars in reserves they invested in U.S. debt and other securities. They also occasionally bought trophy assets, such as Manhattan skyscrapers, luxury homes in London or Paris Saint-Germain Football Club.
Now that oil prices have dropped by half to $50 a barrel, Saudi Arabia and other commodity-rich nations are fast drawing down those “petrodollar” reserves. Some nations, such as Angola, are burning through their savings at a record pace, removing a source of liquidity from global markets.
If oil and other commodity prices remain depressed, the trend will cut demand for everything from European government debt to U.S. real estate as producing nations seek to fill holes in their domestic budgets.
“This is the first time in 20 years that OPEC nations will be sucking liquidity out of the market rather than adding to it through investments,” said David Spegel, head of emerging markets sovereign credit research at BNP Paribas SA in London.
Saudi Arabia, the world’s largest oil producer, is the prime example of the swiftness and magnitude of the selloff: its foreign exchange reserves fell by $20.2 billion in February, the biggest monthly drop in at least 15 years, according to data from the Saudi Arabian Monetary Agency. That’s almost double the drop after the financial crisis in early 2009, when oil prices plunged and Riyadh consumed $11.6 billion of its reserves in a single month.
The International Monetary Fund commodity index, a broad basket of natural resources from iron ore and oil to bananas and copper, fell in January to its lowest since mid-2009. Although the index has recovered a little since then, it still is down more than 40 percent from a record high set in early 2011.
http://www.bloomberg.com/news/articles/2015-04-13/oil-rich-nations-burn…
China is in deep trouble, Europe is it's biggest market.
China Walks $264 Billion Tightrope as Margin Debt Powers Stocks http://www.bloomberg.com/news/articles/2015-04-13/china-walks-264-billi… PBOC’s Reserves Decline by Record on Intervention, Euro’s Slide
China’s foreign-exchange reserves slid the most on record in the last three months, fueling speculation the central bank sold holdings to support the yuan as money flowed out of the world’s second-largest economy.
The reserves dropped $113 billion to $3.73 trillion, the third straight quarterly decline, data from the central bank showed Tuesday. Yuan positions on the People’s Bank of China’s balance sheet, a barometer of capital flows, slid a record 252.1 billion yuan ($40.6 billion), according to a separate statement. China’s broadest measure of credit growth fell short of analyst estimates in March.
http://www.bloomberg.com/news/articles/2015-04-14/china-foreign-exchang…
The problem is bubbles can destroy a lot of money.
The Bubble in Asian securities, especially China-related, is almost on par with Europe. Chinese stocks surged 5.5% this week, increasing 2015 gains to 24.7%. Incredibly, the Hang Seng equities index surged 9.5% over the past five sessions, as the mainland’s equities speculative Bubble now engulfs Hong Kong. Hong Kong’s Hang Seng has gained 14% the past month to the highest level since 2007. The Shanghai Composite has inflated an incredible 90% since this past July.
Chinese officials devoted significant resources to the study of the Japanese Bubble experience. They seemed to comprehend key dynamics, having stated in the past their determination not to repeat similar mistakes. I believe China’s policymakers had finally decided to bite the bullet and pierce their Bubble. The decision was made to significantly rein in Credit and speculative excess. It’s also my view that the Chinese in 2014 embarked on what they hoped would be an orderly (competitive) devaluation against the U.S. dollar.
This policy course, however, was thwarted by the emergence of acute financial and economic fragilities - at home and abroad. The degree of structural impairment had been unappreciated. Risks associated with popping the Bubble had grown too high. Moreover, policy priorities were reworked in response to a shifting geopolitical landscape.
Risks associated with popping the Bubble had grown too high
That is moral hazard territory
Exactly the situation that exists in Auckland property
To fix it now - too many people would get hurt - including the banks
Govt should have seen this coming and nipped it in the bud a long time ago
Hard to say with China, they have mastered Double Speak almost as well as the Americans. "Anti-corruption" does not mean combating dishonesty, it means purging of rivals. The new Emperor has had the ex secret service chief arrested - this is a major coup. The head of the secret service is the most powerful official in a totalitarian state. As Michael Pettis says - only about 50 people really know what is going on in China.
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