Unintended consequences

Builders have been telling Bernard Hickey that orders by first home buyers have dried up since the RBNZ speed limit announcement

29th Sep 13, 8:38am by Bernard Hickey

Are the RBNZ speed limits a construction killer ?

By Bernard Hickey

What if a policy designed to deal with the effects of a housing supply shortage actually worsen that shortage?

That's the sort of unintended consequence that may be emerging from the Reserve Bank's 'speed limit' on high Loan to Value Ratio (LVR) lending.

Master Builders Association Chief Executive Warwick Quinn told me this week that some of the builders who supply 40% of New Zealand's new homes have seen a noticeable slow-down in orders from low deposit buyers in the last 10 days.

He cited one builder who usually built 60-70 homes a month and had taken orders for 12 houses the week before the Reserve Bank's 'speed limit' announcement.

In the week after the announcement orders slumped to just one.

Another lender specialising in loans for construction saw his new loans fall from 6-7 loans a day to just one immediately after the August 20 announcement.

Quinn says it's still early days and the anecdotal evidence may turn out to be a blip, but he is now surveying his members over the next three to four weeks to find out what has just happened.

He has also raised his concerns with the Reserve Bank and is worried the speed limit could reduce the supply of new houses, making the Reserve Bank's job even harder.

"It's counter-productive for the policy," Quinn said.

No one is really sure just how many new homes are bought by low deposit borrowers and first home buyers in particular. Quinn thinks it might be around 15%, although the Reserve Bank thinks it might be closer to 10%. Some builders of more affordable homes have up to 50% of buyers who are high LVR borrowers.

Given about 20,000 new homes are being built each year at the moment, the speed limit has the potential to reduce the number of homes by about 3,000 a year.

"If it's all in Auckland then that's really counter-productive for the policy," Quinn said.

A fall in new home building would also complicate the government's housing strategy.

Finance Minister Bill English defended the Reserve Bank's speed limit this week, saying it was necessary for financial stability. He argued the government's moves to increase housing supply would help first home buyers, even though he cited Reserve Bank advice that the speed limit could force as many as 8,000 first home buyers to delay or downsize their home buying plans.

But if the very policy designed to control house price inflation contributes to it by restricting housing supply then the government has as big a problem as the Reserve Bank.

One factor driving economic growth at the moment is a surge of construction in Christchurch and Auckland.

Quinn would like to see first home buyers building new homes to be exempted from the speed limit.

The Reserve Bank rejected John Key's pleas for an exemption for all home buyers, but it may be more open to one that increases housing supply.

It commented in a bulletin paper this week that its policy is a moving feast and it is open to tweaks.

It may have to get tweaking if the anecdotes are confirmed with harder evidence.

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This piece was first published in the Herald on Sunday. It is used here with permission.

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34 Comments

by Dale Smith | 29th Sep 13, 9:20am 1380399626

For those that understand how land development and building really works –this is not an unintended consequence.

And while many first home buyers will be disappointed, in the long run they may be very thankful they did not buy – yet.

Not that any of this was understood by those that are responsible for this policy, especially if they thought it would increase supply and make housing more affordable.

Consequences are always unintended for the ignorant.

by redcows1 | 29th Sep 13, 10:44am 1380404651

I thought the intention of the LVRs was to control and lower the risks on banks from high risk lending. If this took the heat out then that was the unintended consequence?

by notaneconomist | 29th Sep 13, 2:28pm 1380418087

Loss of Equity in housing would be the biggest problem for banks and overall financial stabilty. The intention of the LVR's is to ensure that prices go higher not lower. If house prices were to reduce then there is less equity.

The so-called unintended consequences were always intended. The RBNZ knows that LVR's will slow the number of builds pushing house prices higher which is what they need to ensure financial stability.

NZ also needs immigrants to help prop up the prices. Everything that can contribute to higher house prices is being undertaken.

The Government and Bureaucrats agenda is completely different from the ordinary citizens.

The average Joe Blogg citizen needs afforable housing. The RBNZ needs more expensive housing. Conflict between what the citizens need and what the bureaucracy needs is always present.

The coffee supping, pencil pushing, brown cardigan wearing, beige mindsets are always distorting the economy and the average Joe Bloggs is always paying. There are no such thing as unintended consequences. Great conjurers always perform using smoke and mirrors to deceive their audience.

by Dale Smith | 29th Sep 13, 4:04pm 1380423870

Well said.

They are either ignorant, or smart enough to act ignorant. But unintended the consequences are not.

by Frostwind | 29th Sep 13, 8:40pm 1380440434

The objectives of all these policies, LVR limit, QEs, bail-ins, bail-outs, negative real interest rate, misrepresented CPI, skyrocketing property prices etc etc is to consolidate the wealth from the 99% to the already wealthy. The rules and laws are written by the rich, for the rich, just that the sheepees don't realize it.

by cowboy | 29th Sep 13, 11:38am 1380407912

Personally I'm hardly surprised that _First_ Home buyers are finding it much harder to _borrow_ money to ***_BUILD_NEW_*** houses based on LVR restrictions.

Actually I'd be shocked and worried if that wasn't the case.

After for a new home build, where's the equity? whats the risk? and thens there's the "off the lot" inital loss, which makes it tougher for folks without compounded equity already.

If they _could_ have build before....then they _would_ have built already. Slapping on a LVR restriction means those who are desparate to go through the "first house flaws" (and second :) ) as their first house ownership are going to have to keep stashing the cash to hit the ante level.

Since we're talking _FIRST_ home buyers here.....

by cowboy | 30th Sep 13, 11:00am 1380492008

even if the 90k new migrants is correct, not all of them qualify as first time home borrowers. many will be spouses or dependents.

by moa man | 30th Sep 13, 1:20pm 1380500421

'Therefore 90k new migrants equate to 90k homeless people buying their first home or renting.'

Jesus Wept, and you complain about Steven's maths.

So a 7 month old baby, that has just arrived as part of a family, is going to buy / rent a house?

by moa man | 30th Sep 13, 4:14pm 1380510851

With the greatest of respect Mr Z , I will also point out your previous statement, only a few posts above as well.

Don't forget that there are 90,000 new migrant first home buyers with fat wallets.................

BTW, my lady friends in LV are of the highest quality. Always buy the best.

by moa man | 30th Sep 13, 4:50pm 1380513019

I see. So when you say...

90,000 new migrant first home buyers with fat wallets.................

These 90,000 new migrants, with distended wallets, aren't actually buying homes then?

There actually isn't 90,000 buyers? Is that what you are saying?

Don't get it.

Perhaps you just want to hype the market up to sell some crap infill box to a load of suckers.

by moa man | 30th Sep 13, 5:58pm 1380517081

So I will take that as a no then.

There are not 90,000 new migrant first home buyers with fat wallets.................

Statistics NZ. 90k new migrants this year: True

Are they all first home buyers? False

It's all hype, exaggeration and bullshit.

Which to me sums up those involved in Real Estate and Property Investing.

regards

by cowboy | 29th Sep 13, 12:22pm 1380410548

"It commented in a bulletin paper this week that its policy is a moving feast and it is open to tweaks."

Is that the new way of saying "clueless analysis and scattershot planning".

I can get a school leaver frycook from MacD's that can throw together a "moving feast, open to tweaks" and then patch up the moving wreck once it's released on to the world.

Is this why we pay big salaries "to get the best people for the job".....

...to have them fiddle and #8 wire the jerry-rigged legislation as it lurches along

by puketepapa | 29th Sep 13, 1:27pm 1380414430

So, explain, why do the hoi-poloi drongos keep voting the lever-pullers in?

by notaneconomist | 29th Sep 13, 3:55pm 1380423323

Maybe the hoi polloi need to read and understand a few things.

http://www.stanford.edu/group/dispersed_author/docs/OriginalMeaningDemo…

by cowboy | 29th Sep 13, 5:07pm 1380427620

Explaining why is easy, and has been done many times by others more qualified.

What I am really curious is what can be done about it. Empowerment of the masses is about the only thing I can think of. But the masses don't want to be empowered. The illusionary carrot is more than enough for them, as long as they personally don't feel the pain.

So how to educate people, teach them to measure for themselves, spread the word.... without making an even bigger mess. v.hard especially while the masters achieve their goals by pouring in more heaving masses - the more people the tighter the resources are spread, the less time people have to think and the more they have to worry and stress about competition pushing them out (or stealing their few gains). Mass ignorance has always been their friend and most effective tool.

Keep people worried enough and they won't even notice you've stopped giving them real options/alternatives.

by Frostwind | 29th Sep 13, 8:47pm 1380440867

Well said,

We are simply seeing the symptoms of fractional reserve banking. Somebody have to borrow, if the Govt. doesn't then the public will need to, all for financial stability

by cowboy | 29th Sep 13, 9:27pm 1380443268

and if the government borrows then when it comes time to make repayments they use a very inefficient system for earning income. They make up for this by using force (and foolishness) to get the funds they want. Force in that it's tax backed by legislation and police. Foolishness is they use inflation to shrink the debt...but that shrinks the real purchase power of their taxbase all round (makes it harder for people and business, especially low income earners and employers).

Which is the double whammy of government spend. they borrow and lose because raising funds through taxatoin costs $2 to get $1. and it penalises the underlying economy making it harder for private sector to borrow. ... thus the fractional reserve respond by reducing prices to higher risk clients to keep it moving... which is bad because the higher risk means they should be charging more, not less, for such endeavours thus making more profit to cover losses and keeping things well lubricated. But instead the lower cost to high risk just to keep business in the door.

by B-Rocker | 30th Sep 13, 11:43am 1380494619

This is the real issue - housing affordability. Restricting high-LVR loans just highlights the real issue, as we suddenly realise that people can't afford to buy a house now that the debt option has been removed.

So we either need to earn more, or lower our expectations of house standards. Or better yet - create jobs in areas outside of Auckland. It is pointless talking about how cheap houses are in small towns, when there are no jobs. Young people need jobs first - that's why they move into the cities - before they can start looking at buying a house.

by Matt in Auck | 30th Sep 13, 12:51am 1380455517

They could introduce grants for first home buyers for new homes like they do in Adelaide. It's a real hand up, and because it only applies to new builds it doesn't do much to inflate prices.

But the nats don't ideologically believe in that kind of thing do they?

by notaneconomist | 30th Sep 13, 9:32am 1380486766

MIA - I don't think the First home buyers grants have served Australia very well as the cause price distortions.

If NZ wants affordable housing then the barriers to achieving this have to be removed.

by bigblue | 30th Sep 13, 10:00am 1380488448

Barriers to building - the Fletcher's/Carter's product supply monopoly, the council and resource management related expenses, the big players that hold all the rural land and the longer they hold it the more valuable it becomes. You ain't gonna remove all of those barriers in a hurry and of course the LVR rules will see at least 20% to 30% less entry level homes built.

by notaneconomist | 30th Sep 13, 11:02am 1380492170

Big Blue - I have posted before on the duopoly issue. There is nothing to stop builders forming their own Co-op and going head to head with the duopoly. Farmers did this years ago with farming supplies. That is how the Likes of CRT now Farmlands came into being.

Farmer groups who got together not only used the Co-op structure to sell goods but to buy goods.

Maybe the Builders lack some vision, expertise or education. Peronally I think a Co-op structure would offer many benefits to the whole of the building industry. Of course some upfront capital requirement would be necessary from each builder to get this started.

A Co-op structure could also offer many additional services to builders apart from supplying building materials. A Co-op could offer a trustee type payment system that ensures builders get paid for work undertaken, compete directly with the housing companies, supply builders insurance packages, OSH type programmes etc.

It is up to those in the industry to effect change and too many builders are used to the duopoly and I don't think too many are thinking about the opportunities that exist for them.

by bigblue | 30th Sep 13, 9:37am 1380487067

Housing market in small cities and provincial towns will take a massive volume hit under the new LVR rules. Take Nelson/Marlborough region where median price is $330,000 - a buyer who previously had a 10% deposit of $33,000 will now need a deposit of $66,0000 - not easy to save another $33,000 after tax on a median Nelson/Marlborough income. Only way they can purchase with $33,000 deposit is to find a house for $165,000 - simply not possible! If 30% of sales in the Nelson/Marlborough region in the last 12 months were to buyers with less than 20% deposit then sales volume could drop from 3,100 over the last 12 months to 2,170 - flow through impact will be significant for mortgage brokers, valuers, conveyancing lawyers, building inspectors, etc. Days on market will expand from less than a month to perhaps a year on average. It is highly likely that the impact on house sales volume and new house construction of these new rules has been massively underestimated.

by bigblue | 30th Sep 13, 9:43am 1380487428

John Key says that 39,000 homes will be built in Auckland region over the next three years - sales data indicates that in the 12 months to August 2013 only 1,710 sections were sold in the Auckland region over the last 12 months. Keys 39,000 prediction is more likely to be an actual total of 6,000 or 7,000 over three years. Politicians have no idea!

by bigblue | 30th Sep 13, 9:48am 1380487702

Buyers who purchased homes/apartments off the plans and who only have a deposit of 5% or 10% and need to settle over the next 6 to 12 months are likely to be in serious strife under the new LVR rules -- may have a big impact on the developers too if they cannot achieve settlement. Interesting times ahead.

by Brendon | 30th Sep 13, 11:27am 1380493640

A number of changes could be made that would lessen the LVR impact on first home buyers.

The government could either refund GST for home builders who are NZ residents or direct GST from construction to an infrastructure account that could give building grants to first home builders and/or give grants to Councils to invest in the infrastructure needed for new housing.

These additional expenses/ loss of revenue might effect the government deficit but given most first home buyers are net borrowers, their incomes will be spent elsewhere. So the net effect might be no change in GST receipts.

Developer contributions and other fees charged by Councils could have a maximum amount and the debt annuitised and paid alongside rates. So new builds would exchange high one off charges that are paid off by mortgage debt to a new smaller annual charge that is paid alongside rates. This would reduce the debt incurred by our banking system, in effect it is swapping private debt for a new property tax and the Reserve Bank should support this as it decreases the risks to the banking system.

This would also have the benefit of making Council charges explicit and the charges could come into effect when the house becomes a residency. Thus encouraging Councils to speed up the consenting process.

by steven | 30th Sep 13, 11:36am 1380494195

Brendon, the idea is we impact the FHB...they are the root of the problem. 15years ago the max a bank would lend was around 80% over 25years. These days 95~96% and 30 years is the norm, that is what has boosted house prices into a bubble. So what we want to do is get back to that sanity, rather than sell to anyone who has a pulse.....which is the US's NIJA method and where we are heading.

regards

by two otherguys | 30th Sep 13, 11:58am 1380495531

Thirty-five years ago the norm was 70% fixed for 25 years. No resets. No revisions.

by notaneconomist | 30th Sep 13, 12:19pm 1380496769

TOG - and people were penalised if they tried to pay extra off their mortgage.

by steven | 30th Sep 13, 12:22pm 1380496951

They still are I think, though it depends on the amount....

regards

by notaneconomist | 30th Sep 13, 2:40pm 1380505239

Steven - I would sincerely hope that the general populace is slightly more informed by now and that they don't tie themselves into those rediculous type mortgages.

by Brendon | 30th Sep 13, 12:43pm 1380498205

The problem is not the first home buyer. They are just trying to find somewhere stable to live. A basic necessity in life.The problem is the debt they need to acquire to get that stability...

What is obvious from these endless property discussions is that their are many ways to structure the housing market that will effect existing house prices, new build costs and prudent borrowing levels.

I don't think anyone thinks the status quo is the optimal solution. Now we know that neoliberalism is not optimal, we can debate and find a safer more socially equitable solution.

by notaneconomist | 30th Sep 13, 2:57pm 1380506232

Brendon - there is always someone who wishes to blame something like neoliberalism.

Definition of 'Neoliberalism' from Investopedia

An approach to economics and social studies in which control of economic factors is shifted from the public sector to the private sector. Drawing upon principles of neoclassical economics, neoliberalism suggests that governments reduce deficit spending, limit subsidies, reform tax law to broaden the tax base, remove fixed exchange rates, open up markets to trade by limiting protectionism, privatize state-run businesses, allow private property and back deregulation.

Just tell me how neoliberalism over the last 10 to 15 years has been applied?

Public Sector grew astronomically, Governments have increased their spending, subsidies for things like WFF have been implemented, NZ has a large number of tax treaties which allow off-shore foreign investors to contribute nothing in income taxes to NZ, protectionism is granted to most of our trading partners in their own country, State run business is everywhere, private property rights are not recognised in the Bill of Rights and where is the deregulation - we are once again highly regulated in every area.

Measures being undertaken right now like State Asset sales and getting the Governments books to balance are only being implemented now. So maybe you should look at the real causes of what has not been working which led us to this point in time and gave us all the problems. An overdose of Socialism has the same effect as an overdose of drugs.

by Brendon | 30th Sep 13, 6:13pm 1380517991

A quick google of neoliberalism indicates it is a very imprecise term. I used it in the sense we used to think there was no alternative to market led reforms. TINA was the term politicians constantly used. But really there is numerous ways to regulate business that will have numerous effects on the different players involved. Some regulations/reforms will be fairer and safer than others.