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As consultation on RBNZ's policy to restrict bank lending to house buyers with little equity winds down, Govt and ASB take their opposition public

Posted in Property

With Reserve Bank consultation on proposed plans for temporary restrictions to high-loan-to-value ratio (LVR) residential mortgage lending by banks due to close tomorrow, pressure is increasing on the bank to soften its stance.

Television New Zealand reports that the Government is pushing for homes valued under $500,000 to be excluded. TVNZ says the Government is "pushing the Reserve Bank to water down the restrictions" by exempting homes under $500,000, arguing low deposit loans under this price aren't so risky.  The exemption would make it easier for first time home buyers to enter the housing market, TVNZ says.

The TVNZ report comes after Key told reporters last month that he wanted first home buyers protected from restrictions on high LVR lending, a concept the Reserve Bank has expressed opposition to.

"I've discussed the matter at length with the Reserve Bank Governor, including last night, and I'm convinced we can navigate a way through which means that the banks have less loans which are more leveraged, but continue to make sure there's opportunities for first home buyers to have higher degrees of leverage," Key said in June.

The TVNZ report comes on the heels of comments from ASB CEO Barbara Chapman in the NZ Herald over the weekend. Chapman said limiting bank lending to property buyers with low equity levels could create a disconnect with the Auckland housing accord, which is an agreement between the Auckland Council and the Government that aims to ensure 39,000 new houses are built over the next three years to tackle a shortage of supply in the city.

"My concern is if apartments are being built with first-home buyers or investors in mind and if you have restrictions on LVRs, who is going to fund the home buyers?" Chapman was quoted saying in the NZ Herald. "It has got to be thought through how it works. There is a concern there might be a disconnect."

ASB last year relaxed its LVR policy for some apartment buyers. Previously the bank had only been prepared to lend 70% of the money required for an apartment purchase, or even just 50% in the case of some smaller apartments, but increased this to as much as 90%. ASB has been doing the most high LVR lending out of all the major banks in recent months. A staggering 84%, or $1.4 billion of ASB's $1.7 billion of home loan growth between October and March, came through high LVR lending.

Submissions on the Reserve Bank's proposed framework for restrictions on high-LVR residential mortgage lending are due in by tomorrow, - Wednesday.

'Speed limits'

The Reserve Bank has said any implementation of LVR restrictions would typically take the form of "speed limits" restricting the share of new high LVR lending that banks may do, rather than banning such lending altogether. The Reserve Bank says it "generally defines" high-LVR lending as loans with an LVR of 80% or more, and LVR restrictions would be unlikely to be imposed below this threshold.

"Each restriction would be specified in the form of a ‘speed limit’: no more than X percent of applicable new mortgage lending over each specified period can have an LVR greater than or equal to Y percent," the Reserve Bank says.

The central bank is aiming to have policy detail finalised by mid-July, with the Reserve Bank introducing new LVR data collection during the second-half of the year. This will require banks to provide a breakdown of their LVR lending by LVR bracket, such as between 80% and 90%. Ultimately, the Reserve Bank says, LVR restrictions might be imposed with a notice period for banks as short as two weeks.

The potential use of LVR restrictions on home loans is one of four so-called macro-prudential tools the Reserve Bank has recently adopted. Finance Minister Bill English and Reserve Bank Governor Graeme 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. It's hoped use of the tools would help dampen excessive growth in credit and asset prices and strengthen the financial system.

Reserve Bank Deputy Governor Grant Spencer last week said risks to the financial system from the current overheating housing market may be greater than those posed by the pre-global financial crisis housing boom. Spencer said the Reserve Bank was "seriously considering" the use of macro-prudential tools to help moderate house price inflation pressures.

"While we believe that LVR restrictions could have significant benefits in terms of reducing systemic risk in the housing market, they are not a panacea," Spencer said.

"We know that LVR restrictions could introduce market distortions. However, we need to assess inefficiencies against the potentially significant economic and financial damage that could result from a housing boom that ends in a severe housing downturn."

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?

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23 Comments

If they want a softer regime

If they want a softer regime for first time buyers under $500,000 then why dont they make the rules reflect that and include all investor/speculators in the lower LVR restriction.  Why can't they be simple and straight forward. 
If their target is investors and speculators why not have an even more strict provision for them.  Again clearly idendify the objective and firmly target that without resorting to a vague scatter gun approach that will cause all sorts of collateral damage.

Exactly - and they could

Exactly - and they could indeed target the rules to favour FHBs - but for the Government that is not the worry. They want investors/speculators to remain in the market - they keep prices up.
 
 

Kate....please to explain

Kate....please to explain exactly who is and who is not a first home buyer!

Yes, no idea how they

Yes, no idea how they determined it in Australia a few years back - but they did. I think it was the Howard Government that offered FHBs $5,000 or some such other sum. Girlfriend of mine had parents who retired there from NZ and got it when buying their first home (first home in Australia, that is).
 
Must be a way.

We used to have a first time

We used to have a first time buyers regiem in NZ when we bought our first home and it seemed pretty clear back then and they had no problem.  Come to think of it isnt there some first home assistance available at the moment.  I am not aware of any confusion with it.  I guesse as with anything there might be some grey areas at extremity but it hardly seems a reason to throw out a good idea. 

FHOG - First Home Owners

FHOG - First Home Owners Grants
 
There were two components to the grants - a Federal Government amount (for a while) and a State Government grant - for a while the sum of the two got up to nearly $30,000 in total and wealthy persons with children were running around buying homes in the names of their children and getting $30,000 for each one .. as always .. wherever there is a government rule .. the street-smart people will find a way to exploit it .. there you go - I've just told you a way around it ..

Poor kids (or maybe not).  I

Poor kids (or maybe not).  I don't think I would want to face my kids if I took their opportunity for a grant. 
All this serves as another example of poorly targeted measures causing unintended results.  Infact the whole first home owners grant in Australia was an example of this because one of the main results was to increase housing demand and thereby raise prices.  So did it really help the new home owners, or instead, the existing home owners  and property investors?  Again it is important to identify the correct objective with closely focused measures.  The problem of house affordability for first time buyers is more likely a result of what should be a compedative market failing to meet demand at a compedative price.  That is the problem that should be addressed not vague, poorly targeted responses that only make matters worse.

Try this It is a brand new

Try this
It is a brand new suburb out the west of Melbourne halfway between Melbourne and Geelong - about 60 kms from Melbourne - Read all about it - think of it as Pavletich City - you can see Melbourne in the distance of the second picture..
http://www.theage.com.au/victoria/wyndhams-services-under-strain-20130630-2p5c7.html

I was in Melbourne a couple

I was in Melbourne a couple weeks ago.
Some commentators are starting to question whether they have squandered the benefits of the mineral boom on all the capital expenditure required (housing and infrastructure) by the immigration boom. 

read this (comment from kimy

read this (comment from kimy and the post above it) you will understand why the NZ government's hands are handcuffed, and can never, never, ever implement such a first-home-owners-grant scheme here in new zealand
http://www.interest.co.nz/property/65168/bnz-chief-economist-suggests-co...

First home owner grants and

First home owner grants and concessions in NSW increased to $22,000
Doubling of the first home owner grant to $15,000 plus $7,000 rebate on stamp duty, for new homes has resulted in a 72 per cent jump in first-time-buyers.
 
Grants only apply to new-builds
Note the quick-out of the blocks buyers in the second picture
http://smh.domain.com.au/real-estate-news/buyers-jump-at-bigger-grant-20130629-2p3v8.html
Had they found a young aboriginal couple they would have photographed them, for sure

The first home buyer? Of

The first home buyer? Of course...easy to identify, the 90,000 new migrants with pockets full of cash and entitled to first home buyer grants? Whose great idea was this?

No, the highly leveraged

No, the highly leveraged first time buyer makes up such a significant % of keeping the prices up and that leverage tree that leaving them out is self-defeating.
regards
 

I suspect that you are right

I suspect that you are right Kate.  It rather underscores the difference between their rhetoric and their true motives. (sorry Kate I missed logging this in as a reply)

Independent Reserve Bank...ha

Independent Reserve Bank...ha ha ha ha...what a laugh. Key and English clearly want to continue stripping 15% gst off the new home suckers....if the govt were really keen on helping first home buyers...they would axe gst on the costs...fat chance of that.
Meanwhile the bubble grows and grows....until it bursts....when that happens you can bet the govt will blame the RBNZ....
Will wheeler have the guts to tell the govt to butt out...not a hope.

First they need to be clear

First they need to be clear that any move is because a.  house price bubble.  or b.  shaky banks.  Of course there is an overlap, but the two problems are different.
I would advocate for some restrictions on high LVR.  80% sounds reasonable.  If such slows the house bubble then that may be of more benefit to the first home buyers than any pain the limit causes.  So possibly a plus for them.
To be of any benefit at all the restriction needs to be across the board.  Otherwise it just get messy - as the wise commentators above point out.

I remember the Aussie grants

I remember the Aussie grants well because I got one , and I also used to organise loans for people who were using them. That was a bit tricky because buyers wanted to use the grant as part of their deposit and it was not actually paid until settlement for obvious reasons.
Tne Grant was  introduced as part of the compensation package when GST was introduced as it was calculated somehow that 10% GST would increase house prices by $7,000 as building costs rose.It was then increased to $14,000 if you actually built a new house as a way to stimulate the building industry. That was as far as it went in Victoria when i was there .
 
The rules were quite simple. Any party to a property purchase or a loan to fund a purchase had to not have had any estate or interest in any residential property in any state or territory of Australia. That was how New Zealanders qualified.  It did get quite tough. If one part of a couple looking to buy a property had owned a home as part of a different couple, even if they had received none of the proceeds from the sale of that property, no grant was available. The government did have a way of checking and there were some fraud prosecutions as I recall as it was necessary to complete a stat dec stating that you believed you were eligible.

The LVR proposal will only

The LVR proposal will only impact on a small sector of the market. A typical Auckland investor couple in the their 50's may have a mortgage free family home worth say $800,000 to $1,500,000 - they could 100% finance the purchase of several rental properties as the LVR is calculated across the entire group of properties against which security is taken. So LVR restriction unlikely to impact on that type of investor - in fact it would assist them to get richer. A recent migrant with all cash will not be impacted at all and a wealthy family assisting one of the kids into a home will still be able to do that with provision of a guarantee. The only people who will suffer under an LVR restriction are first home buyers who do not come from wealthy families and perhaps couples post divorce who each do not have 20% deposit to acquire individual homes once they go their separate ways.
A first home buyer in Auckland with a $60,000 deposit buying a $600,000 home would need to save another $60,000 to buy that same home after the LVR restriction kicks in. There is most probably a panic to purchase taking place right now simply encouraged by the Reserve Bank media coverage of the possibility of LVR restrictions. That in turn is most likely pushing prices higher.
Does anyone seriously think that an LVR restriction is going to cause a reduction in Auckland house prices when it is unlikely that even 4,000 new homes will be built over each of the next couple of years?

You are correct when you say

You are correct when you say somebody with a million in equity will still be able to buy another five houses.  The 80% rule won't deal to everything.  But it will impede those people who manage to run up a couple of million in rental purchases with hardly any equity.  They are there and they are a menace to both reasonable house prices and to wobbley banks.

You are correct when you say

You are correct when you say somebody with a million in equity will still be able to buy another five houses.  The 80% rule won't deal to everything.  But it will impede those people who manage to run up a couple of million in rental purchases with hardly any equity.  They are there and they are a menace to both reasonable house prices and to overextended banks.
With an 80% restriction we will probably end up with a range of second and third mortgages. - remember them ?   Good thing that, as it labels them truely which is an advantage, and prices them properly as well.

The first time buyers and

The first time buyers and subsquent repeated leverage porks the housing market.  As Steve Keen says its the ever increasing (acceleration) of higher and higher LVRs and longer terms that allows the first time buyer to bid up prices.  In turn the seller takes that extra cash and can leverage that cash AND the higher LVR to pay even more, for the next house, rinse and repeat.  hence stop that acceleration and even reverse it and the effects will be big.  I assume JK and Wheeler both understand this, hence they are at odds over cutting out the first time buyer, its essential for 1 and to be avoided like the plague for the other....
regards

We think the ASB is mucking

We think the ASB is mucking cause:
They fund 80% of project costs of development (lending on value up lift once site approvals granted - hence developer equity via development approval....). So its a game to squeeze units out of the site (little boxes)....
They require a fixed price building contract with contingency, they offer drawdowns against QS reports/works complete to the builder (i.e. its the devlopers loan being paid to the builder under bank QS say so.......). They will fund council costs as well...
They require a set number of pre-sales, at 5%, 10% deposit (have used deposit guarantees in the past) - a dep gtee is about $1k to $2k on a credit card.... before laon settles...
They need pre-sales or folk that have taken flipped sales to settle at the property value set when the pre-sales were established (usually before construction finance was approved)... and see funding development (18-24mths) as a way to lending home mortgages (25yrs to for ever)....
 
So from the above, its all about the bank. the way they do you can see works best with property price inflation.....
The scheme encourages cost plus, plus, plus by all..... via fixed price construction, developer not able to screw down the builder, unless of a certain mindset, then all numbers mean little anyway ...
 
The housing product best suited to a buyer, has, not much to do with it.....
How do developers sleep at night, usually very well and often with folk half their age, consoling themselves that it was really all the banks money anyway.........
 

Yummy yum yum! Lower LVR

Yummy yum yum!
Lower LVR equals higher rents. BRING IT ON!!!
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