By Gareth Vaughan
With politicians from both sides of the House lining up in opposition to possible Reserve Bank applied restrictions on banks' low equity loans, is it tenable for the Reserve Bank to now use its new policy tool anytime soon?
Prime Minister John Key's opposition to restrictions on high loan-to-value (LVR) residential mortgage lending has been well documented.
We know Key wants an exemption for first home buyers and the Reserve Bank doesn't want to grant one.
And we know last year Key had this to say;
Any consumer can effectively go around that [LVR controls]. All historical attempts to stop that haven’t been very successful.
You can certainly protect the banks’ balance sheets from over-exposure to the property market, but the capacity of someone to go to their friend or lawyer or some other institution to get that other piece of equity that they don’t have, is always real.
This week Key's rivals have also jumped to the defence of the first home buyer.
We've had Labour housing spokesman Phil Twyford say if his party was leading the Government it would give first home buyers an interim exemption from the "speed limit" on high LVR lending while it built 100,000 homes over 10 years and imposed a capital gains tax on second homes and rental properties.
And Russel Norman, co-leader of Labour's would-be coalition partner the Greens, said even though LVR restrictions are a good idea, they should be targeted at property investors and speculators, not at families trying to buy a home.
The type of Reserve Bank we're supposed to have
The deal between the Reserve Bank and the Government opening the way for the possible use of LVR restrictions calls for consultation with Finance Minister Bill English and Treasury from the point where the Reserve Bank is actively considering macro-prudential intervention.
The Reserve Bank's also required to inform them prior to making any decision on actual deployment of a macro-prudential tool.
A second term for Reserve Bank Governor Graeme Wheeler, should he seek one, also requires government sign off.
So against this political backdrop, what's an independent Reserve Bank Governor to do?
If he really believes it's the right thing to do, stick to his guns and foist temporary limits on banks' high LVR lending.
I for one will applaud Wheeler if he does. Because doing so, in the face of brickbats from the politicians, will show an independent Reserve Bank in action rather than one beaten down by politicians chasing votes and banks lobbying against regulatory intervention. And that is the type of Reserve Bank we're supposed to have.
And nor should Wheeler give first home buyers an exemption. They are key users of low equity loans and exempting them would make a mockery of the policy.
Temporary
My use of the word "temporary" two paragraphs up is important. Some of the more hysterical coverage and discussion on the LVR restriction tool, which the Reserve Bank is still finalising, seems to forget that - if implemented - it's only proposed as a temporary move. First home buyers wouldn't be "shut out" of the housing market permanently.
And even with the LVR restrictions in place, banks have scope to use their high LVR loan quota solely for first home buyers, not property investors, something the Cooperative Bank's CEO Bruce McLachlan has pointed out.
"If we use our example (from a Reserve Bank paper suggesting in any three month period banks are limited to no more than 12% of their mortgage lending being above 80% and no more than 5% above 90%), it's still allowing for 12% of any bank's flow in any three month period to be in low deposit mortgages. It's then very much in the hands of the banks, - how would they choose to use the limit they have? They could choose to use that only for first home buyers."
"I don't think we can say automatically that this is going to disproportionately impact first home buyers," McLachlan said.
Banks reining in high LVR lending
Remember also that the potential use of LVR restrictions on home loans is one of four so-called macro-prudential tools the Reserve Bank has recently taken on. English and Wheeler announced a memorandum of understanding in May clearing the way for the Reserve Bank to use these tools, if it chooses to, on a temporary basis. The idea is that use of one or more of the tools would help dampen excessive growth in credit and asset prices and strengthen the financial system.
The Reserve Bank says any temporary use of LVR restrictions would take the form of "speed limits" limiting the share of new high LVR lending that banks may do, rather than banning such lending altogether. Banks would get a notice period as short as two weeks.
June quarter figures aren't yet available, but key indications suggest banks have reined in their high LVR lending as the Reserve Bank has ratcheted up its rhetoric. This notably occurred in a June 27 speech from Deputy Governor Grant Spencer. He said the Reserve Bank was "seriously considering" the use of macro-prudential tools to help moderate house price inflation pressures. And that the LVR tool "is the one with the best scope to dampen the current strong demand for housing, as well as reducing the risk to bank balance sheets."
LVR restrictions is also the one of the four tools - see detail on all four here - the banks themselves least want to see used. Why? Because its probably the biggest threat to their profitability. And the banks argue, LVR restrictions would be "complex and costly" to implement.
Will they work?
If they are implemented, will the LVR "speed limits" work? They wouldn't have any impact on people buying up local houses with money brought in from overseas. But they would reduce overall bank supply of credit to the housing market and therefore surely have a cooling effect, to some extent, on the market.
But the Reserve Bank itself has outlined potential problems with the LVR tool. These include; adversely affecting efficiency, favouring wealthy home buyers/investors over first home buyers, arbitrage through non-mortgage (unsecured) top-up loans, and a risk of "leakage" to the unregulated sector and foreign banks should there be an increase in new lending by the non-banking sector.
It says restrictions on high LVR lending would need to be "vigorously" enforced and monitored in order to reduce avoidance. It says complying with any restrictions will be a condition of bank registration, or licencing, and that banks would be expected to comply with the spirit as well as the letter of the policy.
A runaway train
From Wheeler's perspective there's no question there's a boil that needs lancing with the Auckland housing market taking on the appearance of a runaway train. Earlier this year the Reserve Bank said about 30% of banks' new mortgage lending was coming through high LVR loans, up from about 23% in October 2011.
As Brian Fallow pointed out in an excellent NZ Herald article earlier this week; "Auckland house prices have risen by just under 20% over the past year, as measured by the Real Estate Institute's stratified housing index. They would only need to return to the levels of a year ago - already stretched relative to incomes and rents - to almost wipe out 20% equity."
This as ANZ economists suggest unemployment could rise from the current 6.2% back up towards 7%.
The major credit rating agencies are certainly watching with both Standard & Poor's and Fitch raising concerns about New Zealand "asset (read housing) bubbles", and Moody's also raising concerns, bringing into question New Zealand's sovereign credit ratings.
With Wheeler apparently reluctant to raise the Official Cash Rate from its record low of 2.5% just yet with the Kiwi dollar already strong and official inflation below 1%, LVR restrictions, and their fellow macro-prudential tools, are the only way he can really attempt to rein in Auckland house prices.
But with political opposition from both sides of the fence, might Wheeler just decide he's picking too big a fight and look for a way out?
If he does, the banks reducing the percentage of new home loan lending being done at high LVRs significantly, might offer him the face saving way out. It appears as if the banks are heading down this path.
Wheeler can then say the Reserve Bank's rhetoric has forced bank's to cool their lending practices for now. But, the LVR restrictions tool is ready to go, with as little as two weeks notice, if required in the future.
And perhaps this has been the Governor's plan all along.
This article was first published in our email for paid subscribers. See here for more details and to subscribe.
25 Comments
Stuff the politicians , Wheeler must administer the right medicine for the symptoms for this problem, or the problem will get worse.
Simply ,Wheeler's decision must be within the RBNZ independant mandate and free of political interferance.
The very reason the RBNZ has an independant mandate is to enable them to make the hard decisions the politicians will not or cannot make.
The housing crisis is simply a function of excess demand and restricted supply of land
And , the Greenlabour plan to use taxpayer or borrowed money to build 100,000 houses in 120 months is so backward and unworakble its just ridiculous , for the following reasons :
1) The Government cant borrow the kind of money needed , it is broke and running a deficit ,
2)The Greenlabour plan could be to TAX & SPEND other peoples money to build these houses, but there is not enough money in the economy to tax and spend on the scale needed and they will run out of other peoples money to spend.
3) Taxpayers that are already struggling to pay their own mortgages cannot be expected to subsidize other peoples houses and or mortgages
4) Where are they going to build these houses when greenlabour are hell bent on keeping Auckland from growing outwards?
Floating rate should be around 5.2% carded max at the moment.
The banks are making hay, while the media pushes the "lowest interest rates ever" line. Meanwhile NZ has one of the highest relative interest rate settings in the developed world.
How can NZ businesses grow when the banks get a sure return of 6 - 14%, when most SMEs are struggling to make 2% on their capital?
Grant A. Abuse from you does no credit to your arguement.
My view is the huge profits of the big four are a rort and indicate excessive.margins.
Your turn to do some homework for us.
List
1. Total profits of the big four banks.
2. Proportion of NZers who bank with them.
3.. Profit per person for each of those
4. Tell us if you think those profits come from margins or something else
5. %of profit to income from interest stream.
Please don't blitz every anti bank comment untill you have done this homework, told us, and thought it through.
You prove my point on not responding specically to the question - the answer to yours; more probably than the rest of the top100 put together, but sitting in the middle of them on return on capital as they have massive amounts of capital invested here; the vast majority (despite there being other options that people haven't wanted to take); no idea but what's the relevance? (Who cares how much Apple is making per capital, how bad is the market dominance of Apple and Sumsung?) profits - other income sources, non interest income, fianncial markets, trade, insurance, corporate & insto services and lending, cost containment, bad debt management etc etc etc; % no idea but what's the relevance ? Basically youre inferring banks don't compete in NZ and that shows a complete lack of knowledge on the subject.
I don't abuse but yes do tend to debate some of the regular populist negative comment about banks which is consistently only coming from about 4-5 of you ?
Grant A is a Social Media Apologist, hired by the Big 4, to infiltrate Twitter, facebook, blog sites etc to spread the good word of how banks are cutting their margins and passing on the rate cuts to businesses and home-owners to provide a prosperous platform for all Kiwis...
The reason I asked KH is that some make big bold statements with little appreciation of the facts, and the fact that they don't know the facts, and admit that they little appreciation of the details, seems to them to be a badge of honor as if it somehow makes them think that they can see the bigger picture by being uninformed whereas others can't - it doesn't stop them quoting a detail number, like 5.20%, but then they admit they can only see the big picture...just amazing I know.
Right now Id suggest Wheeler is in a corner, I can but assume he's an astute operator and wouldnt get cornered willingly. Even the pollies must know what he is saying is correct yet they are still distancing themselves of him....after all there are votes to be lost....
Sad no one seems to want to look at some home truths......
regards
FH - I'm not the one doing the criticising of banks, you are - I actually answered your questions as well as needed for the discussion being had - what part wasn't, unless you wanted the specific stats $Xbln number to quantify "the rest put together" etc? The guy doing the criticising is the one that has to back it up or else he's clearly talking through a whole in his head. Let me answer the one that started this debate with the other guy, who co-incidentlly has just came through and with a typical lame response off subject again, the banks cost of funds for floating mortgage lending is somewhere around the 4.10% - 4.30% area, and at 5.20% would be making roughly a return of about 1% to cover costs, provisioning, and pay a return to its shareholders. Cost of funds in the US for US banks, about 0.25%, mortgage rates, about 3.50%.
Who's banking system are you keen to replicate here ? The other guy doesnt actually understand that business sell stuff ideally above their cost of funding, and banks do not set that when it comes to interest rates....I'm sure you realise.
It would be interesting to see just where they make their %s....CCs for instance still have 80~20% rates I think, yet the borrowing is at 4%....try going into a bank for a car loan at something sensible, they either want it on the mortgage or on the CC..........
Guess Im being lazy though, its probably out there...I think both sides here have a point, banks are not suffering in any way shape or form...thats a sign of a monopoly IMHO, ie when times get tough, a monopoly doenst lose margin...
Then again of course it isnt compulsory to borrow...
regards
Grant A. You don't answer the question yet abuse others when they won't answer yours.
Answer the questions above that i posed to you this morning. 1 - 6. Which relate to bank profits. If you did answer them, then you might rethink your limited approach. (you won't answer them of course)
Wriggle as you might. Bank profits indicate margins are excessive.
Frankly FH, whats the point ? whats it got to do with the question that was being asked ""What specific margin would they be making with a 5.20% floating rate"...absolutely nothing. Not hard to go research it, but it would take time and I repeat whats it got to do with the discussion...when you cant answer change the subject right ?...finished...
Someone check my reasoning here. Hopefully someone with an intimate knowledge of money flows such as Stephen Hulme.
We are getting large numbers of cash buyers, so what effect does this have on the money supply and interest rates? 73% of New Zealands money supply is debt against residential housing. Since the money supply expands when people take out a loan from the bank then housing is the massively dominant method for that expansion. It isn't actually the New Zealand Bank that creates the money is my understanding, that is done offshore necessitating borrowing at an interest rate and the subsequent conversion to New Zealand currency. Once on the NZ Banks ledger it can then be leveraged. So housing is money if you like.
If a non-resident buyer makes a purchase then it is hightly likely that a local mortgage is retired. The leverage that applies to that money is unwound which contracts the money supply. That means less money required from offshore, so low demand means low interest rates.
The offshore buyer does expand the money supply also and there is also a purchase of NZ currency, but the money doesn't get leveraged and has no effect on interest rates.
Seems to me the overall effect on the NZ economy from non resident buyers is to contract it and that eventually the housing bubble will correct itself without any interference, trouble is it takes the economy with it.
One partial factor Scarfie. For NZ based buyers. I might buy a house for cash. But to do so borrow elsewhere. ie. Against my place of residence.
I noted with interest on this site some agents saying there was trend for people moving house, to keep their old house.
I am not trying to contribute anything here about money supply. I will leave that for Stephen Hulme
One partial factor Scarfie. For NZ based buyers. I might buy a house for cash. But to do so borrow elsewhere. ie. Against my place of residence.
I noted with interest on this site some agents saying there was trend for people moving house, to keep their old house.
I am not trying to contribute anything here about money supply. I will leave that for Stephen Hulme
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.