By David Hargreaves
The Reserve Bank says it's not concerned that the housing policies of the new Government will start to push house prices down and says that's not why it has decided to relax the rules around high loan to value lending.
At the media conference after releasing the RBNZ's latest Financial Stability Report, the Acting Governor Grant Spencer was asked if he was concerned the new housing policies of the Government would depress house prices.
The new policies include extending the 'Bright line test' involving taxing potential capital gains on investment houses out to five years, restrictions on foreign buyers, ring-fencing of investor losses and the Kiwi Build programme, which is aimed at providing 10,000 new affordable houses a year.
"Not really. We don't see a collapse of house prices as a particularly high risk so we are not acting because we are concerned the thing's about to fall off the edge.
"...But obviously the Government policies give us....reinforce the [LVR] decision...and give us comfort that there are other policies and factors that are going to keep the house market risks contained."
Asked further whether the move to relax the LVR limits was only about financial stability and not about breathing life into housing market, Spencer said: "This is not an attempt to bolster the housing market or to move it up.
"It's really just a follow-through on our commitment that the LVR policy was a temporary measure not a permanent measure in response to some very extreme risk and pressure in the housing market that we have seen over recent years.
"...So, things have come off. Things are much more moderate and so we need to look at gradually removing this instrument."
The current rules include different criteria for housing investors and owner-occupiers.
Housing investors have to find 40% deposits to buy houses. This will be relaxed to 35% on January 1.
As far as owner-occupiers are concerned, the banks are rationed on what they can lend them in terms of high LVR lending. The accepted definition of 'high' LVR lending is when the buyer has a deposit for less than 20% for the property they are buying.
Under the terms of the 'speed limit' that currently applies to banks they are rationed to just 10% of the new new mortgage monies they advance being for this 'high' LVR lending. On January 1 this will be eased back to 15%.
The real estate industry has been clamouring to have the LVR limits removed for first home buyers, but the RBNZ does not differentiate between the FHBs and repeat buyers with the LVR restrictions.
Asked what the advice would be to first home buyers after the rules are relaxed, Spencer said: "I think we would say continue to be cautious. This market has moderated. We expect it to continue to moderate.
"This gives the banks a little bit more latitude in the lending decisions but it's really only a change at the margin. We don't expect it to have a significant effect at all."
While the new limit will theoretically allow banks to advance up to 15% of their new lending on high LVR mortgages, the reality is that what they advance will likely be some way below that.
Keeping in compliance with the LVR rules was and is a condition of registration for the banks - and they have been loath to risk inadvertently breaching them.
According to the Reserve Bank's monthly collated LVR figures the banks have been keeping well below the 10% LVR limit - after exemptions are included. The pre-exemptions monthly figures are at around 10%, but after exemptions the amount of high LVR lending in the past month was just 5.9%.
Separately the RBNZ has over the past year been endeavouring to get debt-to-income ratios included in its 'macro-prudential toolkit' though it has stressed it wouldn't use them at the moment.
Spencer said the central bank still thought a "debt servicing instrument" was appropriate for the macro-prudential toolkit.
"But what we have agreed with the Government is to postpone further consideration of DTIs or that type of instrument for the macro-prudential review that Treasury and ourselves will be undertaking over the next year and elements of this will also come into the Government's review of the Reserve Bank Act - the second phase of that review - the first phase being the focus on monetary policy.
"We still think it is relevant to have in the toolkit. We certainly don't think it is relevant to be applying now given that the housing market has moderated substantially...but...consideration of that has been deferred somewhat."
In terms of bank lending policies, Spencer said the RBNZ felt that in recent times bank credit standards have "been reasonably tight" and that is going to continue.
"...We still think they will be applying a pretty tough approach."
The RBNZ has not set out a schedule for total removal of LVRs. "Because the removal is conditional on things remaining stable and risks remaining contained. So, we will review it from time to time - our internal reporting cycle tends to be quarterly - and make further adjustments as appropriate. "
65 Comments
"...But obviously the Government policies give us....reinforce the [LVR] decision...and give us comfort that there are other policies and factors that are going to keep the house market risks contained."
Are there already polices to contain the house market (downside) risks? what are they? IS relaxing LVR on of those policies?
Does the Reserve Bank see a collapse of house prices 'as a particularly high risk' due to excessive leverage?
Does the Reserve Bank see a collapse of house prices 'as a particularly high risk' due to a China debt implosion?
Does the Reserve Bank see a collapse of house prices 'as a particularly high risk' due to well documented "Australia's house of cards"?
Does the Reserve Bank see a collapse of house prices 'as a particularly high risk' due to withdrawal of QE?
Does the Reserve Bank see a collapse of house prices 'as a particularly high risk' due to absurd price to income ratios?
Does the Reserve Bank see a collapse of house prices 'as a particularly high risk' due to ridiculously low rental yields?
One just has to ask the right question.
Not surprised that the Reserve Bank doesn't foresee a house price crash coming.
That's a widespread/mainstream view across NZ.OK, so you think the beliefs of the sheeple validate a RB press release.
Actually, it's a little different. The objectives of central bank media releases are to assuage any fears and to send smoke signals that don't create panic. The beliefs of the sheeple are irrelevant.
When it suits you the RB is right? Just as the fed said there was no housing bubble in2007..
Based on the Fed's POV, there was no housing bubble. Even if they "secretly" thought there were a bubble, do you think they would arrange to communicate that on the front page of the NYT?
Yes the RBNZ counts on the blinded mainstream to be comforted by those words to stop the whole thing imploding.
Can you imagine if the RBNZ said they see a housing collapse as a huge risk and that they expect house prices to fall and keep falling,................. complete panic!!!!
you need to read what they DIDNT say.
He didnt say that he though a collapse in the housing market was a "very low" risk
The market is now moderating, not cooling or flattening
Wisen up
Hi TTP
I don't yearn for a crash, I anticipate a large correction along with another GFC because that is what all the levers point to..
My satisfaction is in taking the facts and formulating an opinion that ends up being correct.
Of course there are no guarantees on what the future holds but therein lies the excitement.
You on the other hand are always irrationally positive is spite of whatever facts present themselves which is why many assume you are a RE agent.
If my predictions are wrong well I'll take that on the chin but Im confident that unless the government pulls a rabbit out of the hat that we are headed for a major downturn and its going to hurt
Hi thegic,
If RBNZ really saw a crash coming (and that the banks were seriously exposed) you can be certain that it would have acted deliberately by now - and the market place would have picked up the signals and be well aware of what was going on.
BUT, that's not the case. RBNZ has stress-tested the banking system (no doubt under a range of assumptions/scenarios) and it doesn't see a big risk.
Fair enough for it to communicate that to the markets and public.
RBNZ has its own reputation to think about: it doesn't say or do things that are daft......
TTP
so please explain why last year the RB speech was 180% in a different direction.
it seems to me there has been a change they dont want to put out there in case they make it worse
https://www.rbnz.govt.nz/research-and-publications/speeches/2016/speech…
The Reserve Bank has a range of policy options available. One is tighter LVRs to counter the growing influence of investor demand in Auckland and other regions, and to further bolster bank balance sheets against a housing market downturn. Given the growing housing market pressures across the country, one approach would be to adopt a single national LVR limit for investors. Given that the banks have much of the relevant systems work in place, we expect that such a measure could potentially be introduced by the end of the year.
.
Overall, New Zealand house prices relative to incomes are 32 percent above their long run average, and the second highest in the OECD[2]. The IMF estimates that New Zealand house prices are around 20-40 percent overvalued based on long run affordability metrics
The Reserve Bank considers that rising investor participation tends to increase the financial stability risks relating to the household sector in severe downturn conditions
That range of assumptions/scenarios is just that. Assumptions. Most of which are taken in isolation.
There is no way the RBNZ guv is sitting in his office looking at all the adverse data right this minute feeling smug.
Our RE market is looking shaky whichever way you look at it.
Hi,
I read todays comments from the RBNZ differently.
here are few important remarks from G Spencer:
"Spencer said the Reserve Bank doesn't see a "collapse of house prices as a particularly high risk" and that any future adjustments will depend on risks posed by the property market to the wider financial system remaining contained. " .. so they are trying to contain the damage LVR poses on the wider financial system as all things are related.
then: "The financial stability report notes "the level of house prices remains particularly stretched relative to incomes and rents in Auckland and some surrounding cities" and if there was a "disorderly" correction it could amplify an economic downturn." .. So, despite the stretch and high prices to income that they see in the market, they are keen to prevent a disorderly correction that could cripple the economy ( in my view, by doing just what they have done today) - Hence I don't see rabbits pulled out by the Gov to cause severe corrections ... My view , House price appreciation in the main centres shall hoover around CPI+ ( 2 - 5% pa) for some time ( maybe few years) obviously depend on areas and quality ( I still expect the lower quartile house prices to depreciate a bit more to meet their real values) until some supply catches up and moderates some demand.
However, as you said we could all be wrong and eat our hats if the wind blows South.
http://www.sharechat.co.nz/article/91c88ca5/incremental-lvr-changes-to-…
Interesting that this happened before the market has really been tested since it started ‘moderating’. I would have thought that they would have waited for the early 2018 busy real estate period before making this move. Still 5% more for FHBs and 5% off for investors isn’t a massive change so probably just ‘tweaking’.
Selling below CV a sign of the times?
https://rwremuera.co.nz/auckland/remuera/13c-corinth-street-18135624/
If you sell in this part of the cycle you will look back in 8 years time and see that you sold for half price.
The banks have engineered this part of the cycle to conrol the curve before it allows the upward momentum again. The GFC the banks engineered a pullback in lending as they control it and later release for the next upward curve.
You think wages are going to increase that much in 8 years? I hope you are right, but I sincerely doubt it. Prices are already at 8-10 times income, if incomes don't increase no one will be able to buy, and no sane landlord would want to rent them out for what the market can afford to pay in rent. 3-5% yields is a mugs game.
Economists forcasted a drop in 2007 when the GFC hit the major banks cut lending and developers went under in Auckland.
House prices Doubled since then and wages were not a factor.
Major banks control the market and it is a cycle that is adherd to historically and going forward regardless of disasters or political policy changes.
The ad saved on my phone reads, "Sale of 0.5 acre sections on Clarendon Road, St Heliers, starting at 100 pounds". That was on Wednesday, 26 November 1919. There's probably still some family out there rueing that great grandpa always thought he could buy it cheaper, but never did.
In 1919 100 pounds was less than a years wages for a typical fulltime employed tradesman (and that was probably the household income since wives typically didn't work). Try finding a half acre section in Auckland for $200k (much better than the median income of a typical couple).
*in 1922 average wage for an industrial worker was ~200 pounds
Here's an interesting and very concerning excerpt from the RBNZ financial stability report - "It is estimated that only 8 percent of households currently own investment properties but these households account for around 40 percent of housing debt"
If a large proportion of these 8 percent of households get into some sort of financial difficulty or reassessment (such as inability to roll over interest only loans and have to go P&I, interest rate rise, banks requesting additional collateral calls, non bank lenders cutting lending, healthy homes bill requiring major capital expenditure improvements, non deductibility of losses on investment properties against other taxable income, non deductibility of capital losses on investment property but with taxes on capital gains under the bright line test, capital gain oriented investors now have expectation of no capital gain in next few years, investment properties becoming negative cashflow, etc) then they could be under pressure to sell their investment properties. Given that they owe a large proportion of debt, this could be a large number of properties coming onto the market at the same time which could depress property market prices ...
CN, you echo my thoughts exactly! it's a long and treacherous road down the other side of this debt mountain. As equity erodes further the vicious cycle of selling down of portfolios accelerates. The bank is no longer the speculators best friend when theyre being ordered to sell down in order to reduce exposure to low equity or interest only loans!
How many thousands/millions of investors are out there, and how many are sensible. Im yet to meet a lot of people with common sense, as I find common sense uncommon (yes you can include me in that). So sensible investors may hold and may be alright, but I think their may be a few who are not sensible.
All you need is a few to start the panic. Was that 200K off the median in central Auckland. Wasnt Auckland the starting point for the house price increase for the rest of NZ.
Interesting times indeed.
Swapacrate, It is simple to be an investor - all one needs is some capital, then they can purchase any asset (regardless of valuation). When assets are not in a price bubble, this approach works fine. Most of the time assets are not in a price bubble, but occasionally they are. If an investor hasn't ever experienced a price bubble, they may not have any indication that they are in a price bubble - they simply don't know what they don't know. That is one reason that price bubbles occur in the first place - recall the 2001 internet bubble for instance, or the housing bubble in the US in 2005 / 2006.
However when there is a price bubble, one needs to be an intelligent investor to be able to recognise that you are indeed in a bubble. To be an intelligent investor requires constant learning or training about investing, particularly macro-economics, asset valuations and financial history which most investors neglect - they assume that what has worked well in the past will continue to work well in the future. Intelligent investors know which metrics to look at, and monitor to spot a price bubble or the elevated risk of a price bubble. An unintelligent and uninformed investor will not know even where to begin to look, even though the clues are there, or they focus on the wrong metrics and reach the wrong conclusion.
It doesn't matter though does it TTP? Because houses never go down and NZ is different from other housing markets, and nothing structural has changed, these are just gentle oscillations and as per your advise, regardless of risk, FHB's should just plough in with as much debt as they can get, because the market always doubles every 7 years despite the current fundamentals being completely divorced. And so investors don't need to worry, because they can just stay the distance, because they won't have any other potential financial issues. And banks tightening lending, and the money supply shrinking won't have any effect either.
*ahem sarcasm ahem*
Hi Gingerninja,
You write, "nothing structural has changed".
As I have been spelling out for a long tine now, there have been large structural changes over recent years impacting on NZ.
To a considerable extent, these structural changes explain the price hikes in various property markets - including Auckland and Wellington.
TTP
As for structural factors TTP, there have been several major structural factors that have impacted on pretty much every housing market across the globe since the 50s. Double incomes, globalisation, HUGE changes to bank lending behaviours and regulations, MAJOR demographic changes, political sentiments and laws. Even climate change has become a structural factor because governments globally have implemented legislation to enforce more sustainable and energy efficient homes (just one example but there are many and likely many more).
You keep repeating "structural factors" without accepting that whilst structural factors are not cyclical, they DO change, not just in the past, they will change in the near future and far future too. I don't get the impression that you fully understand how the current structural factors could potentially change the NZ housing market for instance.
A major structural factor that will effect NZ from now and for the next 20-25 years is that baby boomers are now retiring and they will also start dying. Baby boomers are the biggest native population and they own most of the wealth in NZ. Demographically, retiree's spend less than other age groups, so this generation is about to start having a downward pressure on the economies of many countries, including NZ. If they downsize, they will release bigger homes to generations beneath them who are smaller in number (Gen X is a much smaller generations, Millennials are bigger, but that has also been about immigration for NZ). This is happening at the same time, as global political backlash against globalisation and world birthrates have been in steep decline since the 50's (population is still growing but only because there were just so many of us already and exponential growth momentum). So why not mention that as a structural factor? Or why patently ignore such factors? These are all looming structural factors that are downside, rather than upside. But they are no less significant.
Yes house prices have risen for the past several decades but these can be easily understood and explained in terms of women joining the work force, human population booms, while requirements and standards for housing have increased, meaning houses are more expensive, advanced and take longer and require more skills to build, PLUS banks did not lend anything like what they now lend for people to buy with, so that has been a huge factor.
However, what are the new structural factors on the horizon to propel the housing markets for the next several decades? Please tell me that and perhaps someone can understand you. Yes immigration is potentially one, but politics could change that, or else immigration might enter a decline again, as it has on a cycle with NZ before.
Personally I believe, that what has propelled house prices in the past few decades, has been essentially couples almost doubling their income with two working partners. The baby boom and the financialisation of the globe, with ever more complex financial and insurance products. I wasn't around in the 50's but I do understand that once upon time, banks couldn't create credit to give someone a mortgage, someone else had to pay back one first. So these kind of factors go a long way to explain the growth in house prices that you constantly refer to. However, what can be new structural factors to continue to propel house price growth as dramatically? Especially, in light of other structural factors that present a very probably downward pressure?
Hi Gingerninja,
I like your point about families and double the income from two working partners - which is quite a shift from generations gone by. Yet, we can easily miss/forget such changes.
Other key structural factors of importance in the current era include international security (including biosecurity), globalisation and factor mobility. And of particular relevance to NZ is geophysical. (Consider what the Canterbury earthquakes did to the local economy - and much wider.)
And, yes, structural factors can and do change over time - but in ways that may not confirm with the patterns of more standard cyclical behaviour. An economy (or a series of markets) can move to a new plane/stratum - and sometimes rapidly - following the impact of structural phenomena.
Great to explore new frameworks for thinking about the issues. It makes the study of consumer and investment markets (including property markets) so much more meaningful - and rewarding - I reckon.
I'm chuffed that your appetite's been stimulated - and confess to being a little flattered that you should write such a lengthy and well-considered response to my modest post. It was super to read.
Anyway, relish the new insights!
TTP
TTP, I was just procrastinating, I type extremely quickly and generally pretty verbose at the best of times anyway. I wouldn't take it as a compliment ;-) but I thank you for your response all the same.
Factor mobility is a big one, I agree. NZ could outsource elements or all of housing construction and even with transport costs, housing would still come in cheaper than the ridiculous build prices poor Kiwi's suffer.
I have been very tempted to buy an old, slightly dilapidated chapel that has come up for sale recently. My hubs and I have always wanted to renovate a chapel, and that would be an absolutely dream forever home for us. But then the information pack came through and I got my first read of an NZ heritage covenant. OMG!?!?! We wouldn't be able to blow our nose in that building without paying a fee to Heritage NZ it would seem. At despite having renovated much older building in the UK myself, and being a meticulous and passionate lover of period buildings, I realised that I wouldn't be able to do a thing in that building myself. Any changes would be nigh on impossible and the whole project so cost prohibitive as to make it an nonviable project for almost anyone I should imagine. I spoke about this somewhat with friends in the field and their experience has been that in such circumstances, it is so cost prohibitive to restore these heritage buildings that they are simply left to rot. Which has been the fate of this particular building over the past decade.
So there's another structural factor to NZ housing problem. The red tape is a farce. It's not pragmatic and is seemingly dysfunctional.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.