The Reserve Bank might use its new "macro-prudential tools" within a year in an attempt to cool the housing market, Westpac economists say.
However, they don't believe the RBNZ will resort to the much-talked-about potential limits on loan-to-valuation ratios (LVRs).
The RBNZ has been looking at a range of options aimed at addressing the build-up of system-wide risks in the financial sector. Last week, Finance Minister Bill English said that a memorandum of understanding between the RBNZ and Treasury as to how these tools will be used could be signed off by mid-year
The Westpac economists said that despite the seeming urgency around getting these macro-prudential tools in place, they believed that borrowing would need to be growing faster than it is today before these tools were activated.
"The latest credit data for January showed that housing lending has been growing at an annualised pace of around 5% for the last few months.
"That said, if our forecast of a 9% rise in house prices this year pans out, we could still see these tools triggered within a year," they said.
However, while there has been much public discussion around the potential for limits to be placed on how much banks can lend on houses relative to the valuation of the houses, Westpac reckons the so-called LVRs limit is actually the least likely of the four options to be used.
Prime Minister John Key is known to be opposed to it.
The Westpac economists say that in practice such a rule would be difficult to police and they note that this is the only one of the proposed tools that doesn’t form part of the current fabric of banking regulation.
"They [the LVR rules] run the risk of becoming politicised, and they can even be counter-productive by masking the true degree of risk in the financial system. The more likely option is increased bank capital requirements, which is the approach that other developed countries have taken in recent times."
As discussed previously by the RBNZ increased capital requirements could be done a what's known as a counter cyclical capital buffer. The Reserve Bank has given itself the discretion to utilise this tool from 2014. It would be a buffer of common equity added to banks' regulatory capital requirements during periods of "excessive" credit growth. The aim would be to help protect the financial system during a subsequent downturn.
The Reserve Bank has said it could vary from 0 to 2.5% of risk-weighted assets, but it's possible no formal maximum size will be set, meaning the scale could be set according to circumstances. It would come on top of existing capital adequacy requirements including a new 2.5% conservation buffer being brought in from 2014. The conservation buffer's designed to ensure banks maintain breathing space above the minimum capital ratio requirements to be used to absorb losses in times of financial and economic stress.
Banks' minimum tier one capital ratio, representing shareholders' funds in the bank, is now 6% of risk weighted exposures. Banks' minimum total capital ratio is 8%. The Reserve Bank has said banks will get up to 12 months notice before the implementation of a counter cyclical credit buffer.
11 Comments
"The Westpac economists said that despite the seeming urgency around getting these macro-prudential tools in place, they believed that borrowing would need to be growing faster than it is today before these tools were activated."
Come on everyone help the economy out by borrowing more. Quick!
"The latest credit data for January showed that housing lending has been growing at an annualised pace of around 5% for the last few months.
Latest nominal annual GDP @ 2.63% will have to accelerate or we will be sinking once again, and by degree far worse, into case of borrowing more than we produce/spend.
Absolute rubbish. Those economists arguing it is dangerous and impractical to limit LTV's are both wrong and venal. I would extend the later term to the RBNZ if they do not make use of this particular macro prudential tool. There is overwhelming evidence of this tool being used without danger and with good effect elsewhere, and NZ has the highest LTV's in the developed world, along with the highest house prices. This dangerous combination makes it exponetially easy for households to take on debt which is a long term dead weight drag on the economy. This is simple, simple, simple stuff.
Get the f* on with it. Just because John Key and the parnell brigade are against it isn't surprising - and in fact encouraging that it is the right thing to do.
Restricting LVR's would be a waste of time and ineffective as lenders would get around LVRs by support security or 2nd mortgages. It would not capture property trader activity as most of them would be cashed up or able to fund below 80%
One of the hidden drivers of the Auckland property market price increases is the overwealming number of auctions. Almost all the Property press listings are auction - this has been a move over the last few years by the Real Estate coys to pass on more costs to vendors and maximise commision. Unfortuntately an outcome of auction process is the presssure upon buyers, especially the first home buyers, who are pushed to their limits by competitive bidders (likely themselves unfulfilled buyers from previous auctions). Outcome is elevated prices than compared to a normal listed price basis.
Capping the number of auctions, especially for the ordinary propertys, could slow the market down. a tax levied on short term property holds (via LINZ or the solciitors) would cool off trader activty.
auctions are not the cause of higher house prices, they are a symptom of them.
The more buyers in the market versus sellers, the less likely a seller/agent will be able to accurately pick the maximum price their house can get - so a fixed priced marketing method will not be the most profitable.
In that scenario, the agent is very likely to recommend an auction and "let the market decide".
Auctions also happen to be the quickest way to sell a house and therefore the quickest way an agent can get their commission - which is another reason, albeit invalid from the sellers point of view, that an auction may be recommended by the agent.
Restricting auctions to curtail rising house prices? doesn't make sense to me
As above auctions are one of the underlying factors. I have seeen the change over last 12mths where clients have been pre-approved but cannot buy as they keep getting gazumped at auction. When they are finally successful they have ended up paying over the odds (EG one example - paid $850k for a ppty that 12 mths before had sold for $700k)
Theres no one quick fix unfortunately
Confine the mortgage liability to a maximum 80% of any sale price and leave the banks holding the can for amounts lost above that %. Bank credit creation above 80% LVR would end .
In a forced sale the borrower would be assured of a minimum of 20% of the sale price.
I think you have not thought that through steven. Back to the basic point...a flush of cheap credit leads to a bubble...check Spain out....we are little better. So what action can you come up with...to throttle the flow of cheap credit....currently the iron fist ocr smashes the brown stuff out of everyone...new tools needed and some courage on the part of gutless pollies...otherwise NZ heads into bubble repeat with some serious nasty stuff at the far end.
Any thought that the economy could be guided back to one based on saving and away from cheap easy credit ...is just dreamland stuff. The big banks rule this place and they make the decisions about the laws that they will farm the economy under...govt by the people is a joke.
Back to my point...no action will be taken until the brown stuff splatters the Beehive.
Actually I think thats an interesting suggestion. Ideally this would work just like an LVR right? But without actually being an LVR. To me this sounds worse for the banks than an LVR regulation so I expect the push back against it would be harder still. Also wondering what the effect of these policies is on secondary creditors, are they also secured against the 80% of the sale price for example?
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