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Central bank's decision to target Auckland for lending restrictions has to be applauded

Central bank's decision to target Auckland for lending restrictions has to be applauded

By David Hargreaves

Well, the Reserve Bank is certainly having a go, and for that I applaud it.

Something had to be done about the runaway Auckland housing market.

The key change in the new restrictions announced today is of course the decision to specifically target Auckland, while actually relaxing the lending criteria a little in the rest of the country. This kind of specific targeting is something the RBNZ was previously reluctant to do, for reasons that were never clear to me.

Perhaps the one thing you would say on that though is that in previous economic cycles any rise in Auckland house prices has quickly led to rises elsewhere in the country too. But that is absolutely not happening now.

By applying blunt-instrument policies that crack the housing market on the head right around the country, the RBNZ would potentially suffocate the market in the regions - given that the places other than Auckland are not witnessing overheated conditions. What we might now see is that some investors - and indeed potential first buyers - might now look beyond Auckland for house purchases. If the rest of the country now gets a bit of a pick-me-up then that would be a good thing.

The other good thing is, that by announcing the new measures now, the RBNZ is clearing the decks to allow itself to drop interest rates - though whether that will be as soon as next month as the likes of the ANZ are calling for, I would question. I would still go for rate cuts in October and December, leaving us with an Official Cash Rate of 3% by the end of the year.

But, anyway, while I congratulate the central bank on its intent, what the RBNZ has announced today looks to me like a hastily gathered bucket of water. It's the fastest response the central bank could level at the Auckland market right now.

The apparent hastiness of it should clearly tell people just how seriously worried the RBNZ has become about the Auckland market. The depth of its concern will have been increased by the absolute refusal of the current Government to do anything about short-term demand issues in the Auckland market.

The Government is sticking to its 'supply, supply, supply' mantra. But of course the perceived shortage of houses in Auckland is not going to be fixed any time soon. In the meantime the demand pressures - and remember the RBNZ reckons about 40% of houses being bought in Auckland are being purchased by investors - are blazing.

I don't think today's measures in themselves could be expected to put out the fire, but they are intended to at least stabilise the blaze while the RBNZ brings in the full fire engine.

Remember in March the RBNZ announced plans to look at recategorising housing loans held by property investors. At the time the central bank indicated this move could be a pre-cursor to introduction of a new macro-prudential tool, following the earlier introduction of the 'speed limits' on high loan-to-value lending.

All this is still going on. Looking further out from the spectacular headline news of today's announcement, the more key things are how much capital the banks will be required to hold against mortgages to investors, and also the outcome of the RBNZ's review later in the year of bank capital requirements.

The banks have been put on notice. The RBNZ wants to see caution in the banks' lending policies. It is all sensible stuff.

What today's measures, however, are certain to do is increase the volume of the chorus of complaints about the level of overseas investment in the Auckland market. Expect that this will progress from a chorus to a scream.

The fact of the matter is that the RBNZ itself is powerless to do anything about people driving house prices up by paying for the house with good, hard cash.

The anecdotes tell of hordes flocking from Asia with suitcases stuffed with cash and blowing the locals away at auctions as they buy house after house.

There's no doubt there is some of that going on. How much of it - unless we choose to be guided solely by feverish anecdotal gossip - we don't really know.

Disconcertingly our central bank is also admitting it doesn't really know - though Deputy Governor Grant Spencer was illuminating today when he said that the bank's reading of the situation was that as much as 20% of house purchases were of cash buyers (which is a lot), while 8-10% of purchases were "new entrants" not classified as first time buyers.

Therefore the RBNZ thinks that perhaps 10% of purchases are cash ones from overseas buyers.

If true, that's significant.

But it again highlights that this Government has got to get up off the thing it is sitting on and actually gather these figures. Let's for goodness sake find out who is buying, how and where. It would be so simple to organise it and this Government is just being reckless by not at the very least taking that step.

I will leave any talk about how the Government should be looking at taxation, migration, foreign ownership limits etc measures for another day.

All I will say is that the brooding resentment in the Auckland market about foreign ownership is likely to come rather more sharply to the surface as some Kiwi would-be investors realise that today's measures are going to crimp their opportunities of buying a ticket in the Auckland housing raffle.

So, will these measures work?

For starters, the October 1 beginning date is something the banks will probably fight all the way. Don't be too surprised if we don't see it eventually moved back to December.

But what the RBNZ will be hoping for by announcing the plans today is that there will be the kind of shock that we did see ahead of the LVR restrictions in 2013.

What we saw then was that the banks pulled back sharply from new lending because they were simply uncertain about how they would be able to meet the new criteria.

So, we might see a pause for breath in Auckland, followed by a sharp exhaling as the usual suspects vent their spleens about what a dumb idea these new RBNZ measures are and what damage they will cause.

But the RBNZ, unlike the Government, realised that something needed to be done.

I go back to the point, however, that this action is a bucket of water. The RBNZ needs to be backed up ultimately by a Government that is prepared to shut up for a minute about supply, supply, supply and realise it is in our nation's long-term interest to bring a measure of legal control into the levels of housing investment.

Unfortunately this Government is just likely to take the action by the RBNZ as it's cue to keep sitting on the sidelines.

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50 Comments

Sure, overseas buyers who bring money into NZ to pay over the odds for property could well be helping to set the house market clearing price. However when the value of their house drops, if nothing else, those people will not have borrowed from an NZ bank, so financial stability of the NZ banking system will not be affected in a direct way.
It is not easy to speculate on what the mechanisms would be which would instigate this, but if they have to sell their place at mortgagee auction, then that would exacerbate the price falls.

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... I can't help but feel that the Reverse Bank is making it easier for foreign investors to get into Auckland , by hamstringing Kiwi domiciled investors ...

At the least , as Hargie argues , Wheeler is firing a shot across the government's bows that he is interpreting the Auckland housing market as a serious problem .. ..

... but we're still not addressing the key issues of land supply , intensification of land use , and the lack of a comprehensive land tax ...

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THIS STUPID IDEA OF A 30% DEPOSIT FOR LOCALS , LIKE THE MUCH TOUTED 20% LTVR THIS TIME LAST YEAR , WILL HAVE NO EFFECT WHATSOEVER ON THE MARKET .

HERE'S A SHOCKING STORY :-

I live in Chester Ave Greenhithe where the highest street number is 55 , the properties GV's are all around just under $1,0 million but sell for closer to $2,0 million and there are just 3 non -Asian families left in the WHOLE STREET !

At the last Auction in our street , the buyer could not even speak English and the Chinese agent was writing down each bid for them on a piece of paper while she spoke to someone on a cellphone in Mandarin

The property now has NO mortgage over it

So where did the money come from because you cannot get NZ $2,0 million out of China with exchange controls there ?

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Same place that's inundating the US.

Blockbuster real estate deals are back and breaking records as cash from around the globe pours into U.S. office buildings, apartment complexes and other investment properties.

Demand for property from warehouses to skyscrapers is booming, helped by more than six years of Federal Reserve efforts to stimulate economic growth by keeping interest rates low, and stockpiles of cash from overseas investors seeking a haven. About $24 billion in foreign capital flowed to U.S. properties in the first quarter, more than half the total for all of 2014, according to Cushman. Read more

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The Chinese Government is clamping down of corruption and confiscating money etc from illegal activities..
Speak to any customs person and they will tell you many Chinese are taking money out of China for that reason. It is basically money laundering.

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Frustrated National Party loyalist says please read this article John Key!

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I am afraid you will never get National to take the housing crisis seriously. Even John Key denies there is a housing crisis. Too much self interest at stake.

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count the foreign boards that contain ex national MPs and you can figure out who is looking after whom

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David Hargreaves says

hastily gathered bucket of water
apparent hastiness of it

What haste? What hastiness? where? when?

explain

The RBNZ has been talking about targeting the investment sector for more than 12 months

During this time, the Banks and their lobbyists, the Bankers Association have been actively and publicly opposing it on the grounds they didn't have systems in place and needed time to upgrade and prepare

Their time was up

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The first mention I saw of specific Auckland targeting was from the RBNZ Deputy Governor over the weekend. Yes, the moves to target investors have been signposted - but the cutting of lending ratios to for investors, and just in Auckland, to 70%, was not. I'll stick with hastily put together.

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Expect that this will progress from a chorus to a scream.

It's happening already as any non main stream outlet will attest. However mainstream media still cheerlead the great one.. perhaps we are seeing the Murdoch influence?

http://www.stuff.co.nz/business/67448840/rupert-murdochs-news-corp-take…

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This does not bode well for Bill English's expected surplus

News Corp is number 1 on the just announced Australian hit-list of tax-avoiders and profit-shifters

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Funny you mentioned Murdoch's stake. I couldn't help but notice "Chalkie", aka Tim Hunter, and his penetrating critques of all things not so financially above board in NZ are no longer visible.

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Thanks Andrewj. I wonder if he was pushed or jumped? - nonetheless, I will not be paying.

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$245 for twelve months is certainly more than David Chaston charges us :-)

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The best things in life are free.

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you can still get for free on your smart phone for the next three months

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The other good thing is, that by announcing the new measures now, the RBNZ is clearing the decks to allow itself to drop interest rates - though whether that will be as soon as next month as the likes of the ANZ are calling for, I would question. I would still go for rate cuts in October and December, leaving us with an Official Cash Rate of 3% by the end of the year.

Funny how the Governor claims, in your one of your links, in Auckland, low interest rates are part of the problem. How will lowering them nationally aid the regional macro-prudential crusade?

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Funny that

In a single stroke the RBNZ sets a precedent of regionalisation of policies

That means the OCR can now be regionalised and or sectionalised

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What other choices does he have? Wheeler needs to reduce OCR (protecting exporters via currency), but has Auckland to deal with. These changes allow to apply *some* pressure to Auckland while stimulating other areas of need. If anything the precedent of targeting regions is a useful one, should this ship really start to sink.

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So the RBNZ is now tasked with picking winners? Successfully? I think not.

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Beats me, what do the RBNZ expect when they hold interest rates down for years after the crisis has passed? They are very clever people who choose very stupid policies. The National housing bubble, like the Labour housing bubble before it, was enabled by the same stupidity. Clearly it pays well to suck up to their masters.

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Its less about picking winners and more about avoiding mass losers, isn't it?

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So other than people renting property in Auckland while saving to buy a home, who would you like to add to the RBNZ's perceived losers list?

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This is fun. One could argue that reducing the double digit growth of those houses would be beneficial for those would-like-be-home-owners? Should we let Auckland keep going and see what happens?

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Answer the question.

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Is the RBNZ not tasked with maintaining financial stability? Auckland investor activity poses a risk to financial stability.

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They should of thought more about that a while back.

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This will affect banks (less loans, less leverage, less profit) and speculators in Auckland.

It won't have an effect in rents as rents don't depend on how much the house prices grow (selling the same houses to each other but not increasing supply) but rather in offer and demand.

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I'm not sure I'd put renters on that list ( They could be offset by slow house price growth, and increased wage growth). I feel like with the tools the RBNZ has, their giving it a good crack. No one wins if our dollar is unjustifiably high with historically low commodity prices. No one wins if the housing market pops, or dairy farms for that matter. IMHO *inaction* will have a greater casualty count.

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I didn't put renters on the list. That is why I asked you for other candidates. So dairy farmers with over extended farm land prices fueled primarily by debt to the point they generate no taxable income are the losers most in need of moral hazard intervention which was caused by extended moral hazard in the first instance. It seems they are already helpless.

The RBNZ says that despite many farms being in a position to manage down working expenses, around one-quarter of dairy farms are believed to have negative cash flow for the 2014-15 season.

"The sector’s vulnerability to reduced incomes is increased by elevated indebtedness, despite moderate growth in borrowing since 2009."

The central bank said that approximately 30% of the dairy debt was concentrated among the most indebted 10% of farms.

"Indebted farms are particularly vulnerable to a period of reduced cash flow." Read more

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Wow, that's a sizeable chip. As we're both aware, there are tangible risks at play in the market at present. Some of the largest risks for financial stability that we've seen in recent times. Wouldn't it be nice to have all irresponsible investors (of any vertical) take a bath? Teach 'em a lesson. What about all the other bystanders? Give the current generation some war stories of their own... You're smarter than you're letting on.

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Totally agree.

The central bank said that approximately 30% of the dairy debt was concentrated among the most indebted 10% of farms.

What happened above - who turned a protracted blind eye while some geared up with other's vulnerable and under rewarded OBR pre-positioned bank savings?

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Yep, and 20 percent carry half the debt. And I'm sure equally in the big smoke there are plenty of not so clever 'investors' up against the wall. And all of this leads to my original sentiment, "good call Wheeler". What else was he going to do?

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And my original comment up thread : Funny how the Governor claims, in your one of your links, in Auckland, low interest rates are part of the problem. How will lowering them nationally aid the regional macro-prudential crusade? And how will it aid deeply indebted farmers other than to extend and pretend - which is what got us into this mess in the first place?

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Targeting Auckland with PI LVRs will allow the RBNZ (as you mentioned somewhere) to cut the OCR which will help all exporters (not just the bottom 20% of Dairy Farms). We need our exporters in the black, spending locally, because the steam is running out! The real question is will the new LVRs be enough to slow Auckland in the face of an OCR cut?

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We need our exporters in the black, spending locally, because the steam is running out!

Well do it on somebody else's dollar - not mine and my elderly cohorts.

Forty years of sustained current account deficits caused by never ending negative trade balances has yet to see the sky fall in.

I never mentioned the veracity of interest rate cuts - the author of the article did.

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Henry_Tull adds colour to indefensible farmer debt liabilities.

sobering news, dairy debt understated:
http://www.radionz.co.nz/audio/player/201754230

in that non-farm assets have been borrowed against in order to provide "equity" for dairy syndicate or club groups that then then themselves have gone on to borrow farm debt.

Her view, being 50% of her farmer population in a jam here. Read more

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"Well do it on somebody else's dollar - not mine and my elderly cohorts." - That is the funniest thing I've read all day.

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You are easily amused.

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The Reserve Bank is doing what the John Key and his men refuse to do for political expediency and self interest.
National have many solutions to the demand side like banning foreign ownership and raise the bar on immigration. They will never do these things.

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Random numbers on those dairy farms. $40b total? X 50% divided by 2300 farmers equals $8.5m each. That's quite a bit and they can't be average farms. The 10% figure is something like $10.5m.
I make no gaureentees on the accuracy of my initial or subsequent figures which may or may not have been pulled from a odd place.

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This article is very well written and brings out what the actual issues are in the housing market in Auckland. I think while the RBNZ should be encouraged, the present government I am sure will do nothing to complement it efforts on the basis of their known adage " There is no housing Crisis in Auckland" .
There is definitely a CRISIS and the first home buyer (http://niknit.com/first_home_buyer_nz/) is definitely crowded out of the market. RBNZ should clearly define, though the "Investor" and a single home buyer or an additional single investment should not be classified as Investment.
IRD should also be allowed to play an important role in cooling this overheated market. (http://niknit.com/ird-and-housing/)
www.niknit.com

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David approximately 10 weeks ago my ASB personal banker, stated that postcode based tightening of lending criteria were about to come in targeting the Auckland market. So these changes appears to have been getting worked on for a fair while.

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lots of banks were briefing clients weeks ago as to restrictions that were headed aucklands way, the only thing not told was dates

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Just remind me again ........... what is the existing requirement for a deposit ?

20%?

So its going to 30%

So did the 20% rule actually work or did prices go up even faster ?

Clearly its not the solution .

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Actuality the existing minimum requirement is 5% or less, so long as the bank is happy lending and isn't doing more than 10% of total book value under 20%.

And the 10% was not region specific, so banks had been cutting everyone outside of auck off to offer all the 20% and under loans to auck.

Now they get to issue ZERO loans under 30% dep to investors in auck. Big change.

And up to 15% loan book allowed to be under 20% dep if investor buying outside auck.

Banks made to play safe in auck = happy to take on more risk in regions.

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I don't think this will have any impact. What we are all closing our eyes on is the fact that banks are lending in an irresponsible manner . Under the guise of helping people , the banks are doing damage . Home owners are glorified tenants of the banks paying hefty rents called mortgage. It is the banks that own houses as their name is on the title .
One way the housing market will cool off is if the government stops dancing to the banks tune. If the government makes a bold legislation directing the banks that they will have to stick to the low 4.99- 5.5% interest for 30year term of the loan and the mortgage rate be reduced by 2% for the first 15 years should the home owner go through difficulty paying back . This would potentially ease off the burden on the public and cool off the market . The banks are responsible for this Auckland property prices . It is the cheap money that is responsible, not housing shortage .

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