Westpac economists say NZ may follow Canada and introduce 'unconventional tools' to try and cool the housing market such as loan-to-valuation limits

It can't be ruled out that the Reserve Bank may follow through on a suggestion it may limit banks' loan to valuation ratios (LVRs) on home loans in an effort to cool down an overheating housing market next year, Westpac chief economist Dominick Stephens says.

Stephens, who has also pushed out his expectation for the first Reserve Bank to increase the Official Cash Rate (OCR) from its record low of 2.5% to July next year from March next year, says the consequence of low-for-longer interest rates will be more buoyancy in the housing market.

His comments come after the Real Estate Institute of New Zealand said earlier this month the national median house price and the less volatile stratified house price index both rose to record highs in June, while sales volumes for the month rose 17.3% year-on-year. The median price in June was NZ$372,000, up NZ$2,000 from the previous record of NZ$370,000 set in March this year.

"New Zealand could start looking a lot like Canada and Norway, where housing markets are frothy but the central banks are keeping interest rates low due to subdued consumer price inflation and high exchange rates," says Stephens.

"Canada recently resorted to unconventional tools to try to cool the housing market, including maximum amortisation periods for mortgages, loan-to-value limits on equity drawdowns, and requirements for borrowers to demonstrate that housing costs are no more than 39% of income. Is it possible that New Zealand could invoke similar unconventional tightening measures to cool an overheating housing market next year? We would not rule that out," Stephens adds.

Late last month the Bank of Canada tightened its rules so the maximum LVR was cut to 80% from 85% and the maximum debt service ratio was set at 44% of income. The Canadian government also banned the use of government-backed mortgages for properties worth more than C$1 million.

In May Reserve Bank Deputy Governor Grant Spencer said limiting banks' LVRs was an option that could be implemented to clamp down on frothy asset price and credit booms. Spencer acknowledged the Reserve Bank's existing prudential regulatory framework failed to take account of the growing systemic risk arising from a boom in credit and asset prices between 2002 and 2007, which  "aggravated" the severity of the Global Financial Crisis. Reserve Bank staff had been doing "a lot of thinking" about potential new macro-prudential policy instruments including LVR limits, he said.

The recent resurgence of the Auckland housing market in particular has come with banks writing loans with LVRs over 80% and even above 90%.

Meanwhile, Stephens says Westpac expects the Reserve Bank to leave the OCR unchanged at its review next Thursday, July 26.

"The final sentence of the news release, which is usually the bottom line both figuratively and literally, could easily be a repeat from the June Monetary Policy Statement: 'It remains appropriate for monetary policy to remain stimulatory, with the OCR being held at 2.5%',” says Stephens.

And after this weeks news that the Consumers Price Index rose 1% in the year to the June quarter, which is the bottom of the Reserve Bank's target band of 1% to 3% inflation over the medium term, Stephens says Westpac has changed its OCR call.

Westpac's economists now expect the Reserve Bank to delay its first OCR hike until July 2013, they previously suggested March 2013, for three main reasons says Stephens.

"Our latest inflation forecasts, updated to incorporate Tuesday’s low CPI print, suggest that the Reserve Bank will not view a headline inflation print above 2% until the June 2013 CPI is published in July 2013."

"The exchange rate seems more likely to rise than fall over the next year. Indeed, a summary of our global forecasts reads like a Greatest Hits list of factors likely to send the NZ dollar higher: quantitative easing in the US and Europe, recovering growth in China, and higher global food prices due to the US drought."

"The change of (Reserve Bank) Governor may be a factor. We don’t want to pre-judge Graeme Wheeler, about whom we know little. But it does seem that an outside appointee will take a more conservative approach initially than an internal candidate would have."

Wheeler will replace Alan Bollard, the Reserve Bank's Governor of 10 years, in September.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a 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.

47 Comments

Sooner they impliment the better.
Plus tax those who own more than one property.

...sort of.
But what if the rocks are big rocks or there are many of them and they fill a large part of the river bed? The point is to slow it down, not stop it.

LVR controls would be good....but it's more common for RBNZ to sit on hands than do something proactive....and with Govt too, English has been saying since GFC that "households are paying off debt" as if this is the solution to our problems....but when lending taps are back on the households borrow like mad...LVR controls are needed now!!!!

When are these nitwits going to address the real issues?
Over demand and under supply
Grossly over priced  building materials due to an almost total lack of meaningful competition
We dont see other possesions rising in value so irrationaly
Cars
Boats
Tulips?
Because they have working compedative markets

Land is not included in the CPI...it should be....or perhaps mortgage payments...or something....it doesn't make sense that our largest cost of living isn't included in the measurement of inflation.

It became an uncontrollable embarrassment to those charged with the responsibility of falsely claiming they would control inflation so it was removed - my faulty memory says 1983 - but I could be confusing NZ with US or vice-versa.

The website below states land was removed from CPI in 1999:
http://neweconomics.net.nz/index.php/2012/03/land-went-out-of-the-consumer-price-index-in-1999/
This date is a close match to when land values started to surge in NZ.

We can blame that really clever bloke Don Brash for that.

I think it safe to assume Plan B......with his breif tenure at both National and Act,........ the good Dr was not a big picture guy, tended not to see things that were .......coming.

Could not agree more, Ricardo.  The whole property cost should be included in an appropriately weighted form.  If they find it volatile and hard, it is probably due to the fact that the market is not free and cannot find a stable equilibrium.  You do not see anything like same volatility in a stable market sectors e.g. vehicles.  I suspect that the reason that the polititions do not/will not meanifully address it, is because it suits a bunch of powerful vested interests.  To sum it up, I suspect corruption.

No and yes, so you know the limitations of CPI so you can collect and publish your own a metric CPI-L say.  My biggest concern with adding land values to CPI is over-value of land...so food should be commodity priced and then should be fair value....land isnt.   Also in some areas land is going up, others probably dropping, central auckland is hot......wanganui? bet not. 
What does adding land value achieve?  For instance to set OCR you want to take out noise so you dont use CPI but the core inflation metric.  So core inflation has some areas with small inflation, some with big and some with (possibly) deflation, eg communications for instance is getting cheaper in real terms....and with UFB a lot cheaper.
So does having land prices add value to the number? I'd suggest not.
regards
 
 

I see your point....so how do you propose for cost of housing to be incorporated into our inflation measures?....on the surface it's silly for it to be excluded.

Depends on what you want to look at.   So my understanding of CPI is it measures family weekly shopping stress across the nation. In theory tomatoes in Dunedin or Auckland should be rising and falling together (mor eor less), housing accomodation costs on the other hand is obviously not synced, right now at least.
You could create a new measure CPI-H say that includes the hosuing effect That way you keep the historic method so you can do comparisons and you can compare CPI against CPI-H which may or may not be useful.....I would suggest that doing it thsi way would be useful...
regards
 

I say put the noise back into the the equation and hold the RBNZ responsible one way or another - just add the annual aggregate credit growth for all real estate related items to the CPI with the appropriate adjustment to current rental equivalent pricing and building material costs. 

Specifically what noise? and how do you hold the RB accounatble for something that is impossible to manage? Noise is misleading and pointless to try and control especially in a situation of significant and probably varying time lag...its false data after all.
Last sentence, well like I said I'd have a seperate CPI-H with such an arrived value added in.  At least I think its what you are saying as I have to decypher that last sentence down to my level of understanding/english...LOL.
On top of that the RB doesnt at least I assume? try and correct CPI as its volitile but works instead with core inflation to get a trend and correct that.
My other concern is monitoring the health of the economy and significantly, trying to avoid deflation where it is damaging to the economy.  So add in a figure thats inflationary and you might hide something nasty going on that you need to act differently with....right now is such an example.
regards

My other concern is monitoring the health of the economy and significantly, trying to avoid deflation where it is damaging to the economy.
 
The only reason you might have this concern is because a deliberately negligent blind eye was passed over the massive increase in debt issuance between 2002-7/8 to finance realestate purchases and virtually nothing to create new productive capacity to generate income to fund the interest bill.

Steven...your idea seems a bit jumbled...not 100% sure what you are proposing...the overall problem, particularly in the 2000's was that house values were increasing 10% per year, but inflation was within 3%.....and now we have a huge problem with housing affordability....our inflation measurement tools & RBNZ could have done a better job!

Interesting to ponder what would happen if housing were to be included and values were to reduce to something more sane.  People's mortages would remain the same, they would own the same houses so can they really complain.  Is the current situation reasonable or moral where we expect house price inflation to "pay down" the debt.  Falling values will be unfair on recent new owners, but long term owners would simply be experiencing the reversal of their windfall gains so they cannot complain.
Idealy I would not want to see falling house prices compensate inflation in the other sectors during a large downward movement in house prices.  Ie house prices would fall and everything else would go up without any interest rate stabilisation mechanism, so people would be no better off.  So the matter becomes one of timing, and now is probably not the best time to include housing in the index.  It would be best to wait  untill prices return to something more in line with the long term price/wage multiple of 3.5. In other places in the world where they have had their correction like the USA, it would be reasonable, so going forward house price inflation could be resisted by higher interest rates (starting from a more stable and sustainable base).  I supose we (NZ) could get there more quickly if we had house price deflation and income inflation giving a net low inflation; but something doesnt seem right about that to me.
Ponder, ponder ..................................

"Grossly over priced  building materials due to an almost total lack of meaningful competition".. Spot on. 
As example; when we looked at renovating our home, a sheet of Gib was $35 - a similar competitor product "Elephant board" which is more superior in noise, thermal, finishing which would be around $20 but due to excise duty, it's retailed at $38/sheet.. go figure.

OZ though?  Pretty sure I discused this with Mist42nz and gib is $25NZ a sheet I think...
However when you look at USA prices yes and grossly so....if a Power tool in the USA is $500USD that should be somewhere around $700NZD, it isnt its $1600NZD a huge profit margin that is just screwy.
regards
 

2.7m sheet is well over $30 from Bunnings
Yes you're right, last year I bought a Plasode nailer directly from USA for $650 NZD incl. postage + $12 new power adaptor from Dick Smith.  Mt Wellington Placemakers was selling $1100 (same nailer is retailing at Bunnings in Aus for $699).  I know I know it keeps people employed..

Hmmm ah Ok Id consider a 2.4m sheet standard....
Pleasemakers over-charge horribly, I'd also suggest watching consumables like nails and screws as Bunnings NZ are typically 25% cheaper. PMs  tools are silly prices, Makita 12 crosscut saw is $1800NZ and $1400 in Bunnings....still OTT but $400NZ is a big sum.
regards

Wanted a good quality oil filter for a friends Lexus I was servicing. $45 for something decent here and hard to find at that. Bought 5 Bosch ones from the states for $80. Will get getting other parts from there now, as that was just a test buy to see if they were trustworthy.

thats right house shortage gets worse by the day and this is a suggestion to limit investment in houses. If houses are over valued you would think people would start buying them. The problem is that councils & gov have been takeing a ever bigger cut based on prices rising now there is nothing there for those actually taking risk to build.

Surely the RBNZ have known of these solutions before so why have they not used them?
The wealthy will still continue to buy houses regardless of conditionsít is the lower income families that will keep on drowning.

You'd think they would have known of LVR controls....but the RBNZ is captured by the banks...read Bollard's book Crisis and you will see, for example when he initially introduced the Core Funding Ratio it was meant to be higher but he lowered the ratio because the banks complained it was too high...something about how it had adverse impacts on profitability...Bollard is a lap dog....Govt should really step in and change the Reserve Bank Act so that Bollard is obligated to prevent housing bubbles...otherwise it is same old same old.

Political constraints.
regards

Westpac's economists now expect the Reserve Bank to delay its first OCR hike until July 2013, they previously suggested March 2013, for three main reasons says Stephens.
 
"Our latest inflation forecasts, updated to incorporate Tuesday’s low CPI print, suggest that the Reserve Bank will not view a headline inflation print above 2% until the June 2013 CPI is published in July 2013."
 
Some say BNZ and ANZ- National have reservations about lower for longer CPI projections and in fact believe there is a chance of an unanticipated uptick of some magnitude. Whether this view is based on desparate hope rather than hard evidence, who knows?
 
But if one repeats things enough:
 
His comments come after the Real Estate Institute of New Zealand said earlier this month the national median house price and the less volatile stratified house price index both rose to record highs in June, while sales volumes for the month rose 17.3% year-on-year.
 
I guess it becomes the truth for the whole market not just the over represented top strata.
 

"an unanticipated uptick of some magnitude. Whether this view is based on desparate hope rather than hard evidence, who knows?"
Strikes me that they are sitting there clueless so are saying things like un-anticpated to justify doing nothing....or holding thier margins....
Hmmm why would they hope? so they will look credible all of a sudden instead of complete neo-classical fools? I cant see any hard evidence, everything points to a depression and deflation....
"un-anticipated" well if its say a one off increase say +5% GST hike, it can be "looked through"  If its a full scale meltdown of the global economy and no offshre investor one will lend to NZ, well that might send retail interest rates through the roof but it wouldnt be inflationary, its just robbing income so it would be deflationary.....as ppls pay would not be increasing.
At some stage and obviously its a way off such ppl with obsolete and incorrect outlooks will be swept into the corner and left to rot, or maybe they'll get a job at the WSJ or something.
regards

Yeah they better do something about it soon.
With the way the government is changing the laws allowing banks to pump covered bonds mortgage money into NZ.

How is that any different from what the US did with CDO's and securitized loans that caused their massive crash?

Apart from being actually worse because covered bonds are backed by depositors money that have nothing to do with housing, rather than being backed by the overinflated house prices, like it was in the US.

It seems everyone around the world has learnt a lesson, except for the king of the idiots John Key.

The major reason there is concern about house prices is that higher prices make it hard for young people to get on the property ladder. Restricting LVRs and introducing restictions on the % of income that can be used to service borrowing will strike those already struggling to purchase squarely on the chin.Those wealthy immigrants people love to whinge about who force up house prices wont be affected at all. They will just have a bit less competition from Kiwis. How can that be a good idea?
The reserves bank's only role is to make sure the banks are sound and they will already be looking at the overall LVR of lending books and bad debt ratios etc.

Tiresome isn't it waripori. a new arrival, blowing in with a suitcase full of cash isn't going to be concerned about a change in LVR. At all.

Lower LVR ratios won't bother the Chinese mafia currently buying up Ollie's "leafy suburbs" but should give a needed boost to the lower priced towns and cities. In most cases these areas also have plenty of sections or readily subdividable land. Good thing IMHO.

Maybe the abolition of restrictions to immigrant entry to synchronize free trade agreement demands have to be revisited in the name of citizen preference.

May be.
Every time you introduce a regulation to counter the affects of an earlier regulation you have to wonder about the need for the first regulation. Its a bit like introducing a bug to eat gorse and finding it prefers kowhai. We would have been better of without the gorse.
The problem is caused by interference with the free market in housing in the name of planning. We need to fix the supply problem. Earlier comments about more competition in building supplies are probably on the money as well.
Building costs in Aussie are miles lower than here ( or they were a few years ago when I built a house in Melbourne ) and we are constantly told wages are much higher so they must have some efficiency gains somewhere.
 

Stephen Hulme: maybe? some time ago contributor "bob the builder" who seems to be accross these matters said that high-rise apartment development in auckland ceased in 2006 due to the change in local-body planning controls. I said last week, housing controls and immigration controls have to be "synchronised". While it is uneconomic for builders to meet the restrictions, then it is POINTLESS to allow continued immigration to compete with the (natural growth of the) local population. There can only be one winner and many losers.

So if I take your comment about controls preventing high rise development and the comment below about a net migration loss of 3700 people together with rising house prices it is clear the problem is regulation of development not immigration.
What we really need to do is let Auckland choke on its own traffic and have new arrivals realise the possibilities of Invercargill. A wise man from Winton said to me many years ago that what Southland needed was 50,000 Dutch people to swap all those sheep for tulips.

Here is the fallacy of net-migration. Inbound asian migration ALL heads for auckland. Outbound migration (in the absence of statistical data) is more than likely heavily non-auckland sourced with an emphasis from the south island. Then there is internal re-location from christchurch to auckland. There are 40,000 departures from nz to australia alone. And they won't all be from auckland. They are being replaced by what? Yes, inbound immigrants should be permitted (chosen? selected?) on the basis of where they intend to reside. Another thought would be to only provide  "accomodation supplement" and "rental assistance" to areas outside of auckland.

Your idea about restricting areas where the accommodation supplement is available makes sense to me. There is a weird cycle happening in Auckland where high property prices cause high rents which trigger bigger accommodation supplements which feed into higher rents which prop up property prices. Time to cut the gordian knot.
 
Christchurch is a bit different with the post earthquake effect. That should go away on its own over time.

The UK's average house pirce in NZD is $315k vs the NZ average of $372k. The only places doing better than NZ for property are Australia and Canada.
 
Stats show that Permanant Long-Term Migration for the year to May 2012 was a net loss of 3700 people.
 
Why not return to good old fashioned income multiples? No mortgage more than 3x income - this then allows for times of high and low interest rates. I guess there would be no political will for this amongst the house-owning voting class. Could be pahsed in over time so 5x income now, falling by 0.25x income until we reach the the long-term steady value.

.... that isn't the average house price in the UK at all ...... it's the average price of a dwelling ...... many of which are apartments , condos , bird cages in the sky !
 
The average price of a detached house in the UK is above $NZ 500 000 .

The fact remains that there is no better place to park your money (or debt) than in your own occupied home in NZ.   Shares, TDs, Unit Price funds, etc etc are all taxed heavily at the upper end of your salary/income band.  
There is no tax on your growing equity - whether by good buying, rapid debt repayment or sweat equity with self-home improvements.  The taxman just can't get his sticky fingers on this wealth build up that really just happens automatically once you've positioned well in the market.
Better to build your equity, ready for a free retirement. Also better to be able draw down equity when wanted at the lowest interest rate of all debt offerings.
No amount of tinkering is going to change the kiwis behaviour  -   people vote with their feet & chequebook, not by following official economic advice ......

No amount of tinkering? well all the government did was make a small change to the depreciation on houses a few years ago, and with all the crying from property investors you would have thought the world was coming to an end, it was pathetic.

If tinkering doesn't matter then the government should start tinkering away, starting with all the big fat losses that get claimed every year for housing, while the values of the properties keep going up. 

The best place to park your money over the next 10 years is in real estate. Olly says real estate in good suburbs will double in value over the next 10 years - looks like most people think he is right.

And if you are doing what everyone else is,it has to the right thing, logic.

Forget this humbug. There will be no controls because the banks determine RBNZ policy.
 

Whats worse Foreign Banks  now determine RBNZ policy Wooly...with you on that 100%.
As keeper of selective statisics the organisation still functions (almost)...as a watchdog for the interests of  N.Z. economy and therefore New Zealanders they are ineffectual to the point of redundancy.