By David Hargreaves
"Seconds out - Round Three!"
The Reserve Bank's ready to brandish its macro-prudential toolkit again with the aim of jetting water on our raging inferno of a housing market.
Deputy Governor Grant Spencer, who is also the central bank's Head of Financial Stability is speaking at 5.30pm tomorrow at a "private event", in an unspecified location, (isn't it time these very public-focussed announcements were done more publicly?) on the subject of "macro-prudential policy and housing market risk".
It would be surprising to this observer if Spencer explicitly announces new measures. More likely, if the previous RBNZ strategy is followed, Spencer will give some pretty clear broad-brush indications of what's coming. Then the bank will allow some time for 'market' reaction and response and then Governor Graeme Wheeler in probably not many weeks time will follow up with the specific detail of what is proposed.
That was the template the RBNZ worked to when it introduced Round 1 of the macro-prudential measures with 2013's implementation of a 'speed limit' for banks on high (above 80%) loan to value lending. It was slightly different last year when Round 2 - specific targeting of Auckland investors - was introduced, but the circumstances were slightly different given that the RBNZ was then pushing for the Government to make some tax moves against investors, which it eventually, reluctantly did.
Anyway, we should have a reasonable indication a little after 5.30pm tomorrow of what the RBNZ's cooking up for Round 3.
It's to be imagined that Prime Minister John Key, for all that he was being reasonably coy on the subject yesterday, knows exactly what the RBNZ does intend to do.
Based on Key's responses, plus previous indications from the RBNZ, we can be confident that property investors will be targeted. Beyond that there's room for conjecture.
The measures announced last year, and which took effect in November, placed a requirement on Auckland investors to raise at least 30% deposits for buying a property. Additionally, the 'speed limit' on banks' high LVR lending was loosened outside of Auckland.
I don't think it is unfair to describe this second round of measures as having been a complete failure. The Auckland market, after a Christmas pause, has roared ahead, with investors doing much of the roaring, accounting for 47% of the mortgage borrowing in Auckland in May. A 30% deposit? Are you having a laugh, Mr Governor? No problem at all, the investors have said.
Given that the RBNZ has been badly caught out by the failure of the November measures and has been scrambling to assemble new weaponry, it's a fair assumption that as a short-run compromise measure it will apply the same tool. But a heavier one. A bigger mallet. I reckon the central bank will up the ante and say that Auckland investors now have to find 50% deposits.
What about outside of Auckland though?
The RBNZ's November measures may well have contributed to the catching fire of housing markets in other regional centres as some Auckland investors looked for fresh territory. The heat outside of Auckland is now sufficient that the RBNZ will surely move against investors more widely now. But there are a couple of interesting wrinkles.
It is to be imagined that the RBNZ would like to keep some differentiation between Auckland and the rest, given how much more stretched the income to house value ratios are in our biggest city than in the rest of the country. The RBNZ probably won't mind some 'catch up' in income to property value ratios elsewhere. It will, however, have been taken aback by just how quickly that's started to happen.
So, introduction of a 30% deposit limit for investors outside of Auckland seems likely. But, and here's where it gets interesting, will the RBNZ just apply Auckland/non Auckland criteria - or will it decide that some regions are hotter than others therefore they get deposit limits and other places don't. Personally I hope not, because that could get real messy and start producing all sorts of interesting distortions in the market - something which the implementation of the original Auckland measures has arguably already done. What we don't want is people making property investment decisions based on avoidance of regulations. Because that sort of behaviour can then lead to bad decision making.
That's investors. What about non-investors?
Well, remember that the RBNZ relaxed the 'speed limit' on banks' high LVR lending outside of Auckland to 15% of new bank commitments, while leaving the limit at 10% in Auckland. Will this be changed? I now suspect not. Since so much of the market impetus is coming from investors then the RBNZ might decide that targeting them is enough.
Given how the RBNZ has worked these things before, I reckon it will want the new measures in place for October. The original LVR measures were implemented in October 2013, while last year's measures were first targeted for October but had to be delayed to November. The delay didn't do the RBNZ much good. It meant that by the time the new measures were in place the silly season was nearly upon us and the RBNZ was left waiting for March and April property figures to get a good handle on whether the measures were succeeding or - as we now know - failing.
So, that's Round 3
Have no doubts, however, that this round of measures is very much an interim one. Round 4, which is yet to come, will be the real interesting one and hopefully we'll get something of a sneak peak into that one tomorrow too.
Right now the RBNZ is clearly seeing introduction of debt-to-income ratios as a more complete answer to the housing market puzzle. Trouble is, such ratios are not in the macro-prudential toolkit - which appears to have been a bit of an oversight.
I would expect that Spencer's speech tomorrow will give some sort of an update on where the RBNZ is with these and I don't think I'm over-egging it if I say the market might be following this news more closely than the new investor LVR measures.
My view is that I'm not sure the investor limits will work for anything other than a short period of time, for a pause. But debt to income ratios would have a more lasting impact.
Based on the noises the RBNZ has made so far, I think the bank might well want to at least get an announcement on their introduction early in the New Year.
Anything else?
The amount of time it has taken the RBNZ to launch a new initiative does make you wonder if there's been some consideration given to throwing something else at the market too.
In that regard I was most interested in, and gobsmacked by, the new series of figures the RBNZ's now releasing, which show that over 40% of new mortgage lending is being done on interest-only terms. For investors the ratio's even higher, at around 55%.
Surely at least cutting back, sharply, on the amount of interest-only loans would dampen the enthusiasm of some investors and would be worth considering as a new measure to deploy.
If the RBNZ's not at least considering that, then it should.
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