RBNZ says first home buyers may benefit from being temporarily shut out of the housing market

The Reserve Bank says first home buyers may benefit from being temporarily shut out of the housing market, and estimates restricting banks' low equity residential mortgage lending will result in 1-3 percentage points weaker credit growth during the first year the restrictions are in place.

In its Regulatory Impact Statement accompanying yesterday's announcement of the introduction of "speed limits" on banks' high loan-to-value ratio (LVR) lending, the Reserve Bank estimates 12% of banks’ new lending is to high-LVR first home buyers.  It says the use of its speed limit approach, rather than an outright ban on high-LVR lending, will help ensure first home buyers continue to have some access to high-LVR bank lending.

It says exempting first home buyers from the restrictions "would significantly undermine" them given first home buyers are a significant proportion of new high-LVR residential mortgage lending.

The Reserve Bank suggests first home buyers unable to borrow will remain renters.

"This could result in financial costs to these first home buyers if house prices continued to increase while the restriction was in place. They would also lose any welfare gain due to any non-pecuniary benefits that accrue from home ownership," the Reserve Bank says.

"Alternatively, it is possible that first home buyers may gain from being temporarily shut out of the market, for example if house prices fall in the future, or if future mortgage rates placed them under financial stress. Costs to first home buyers would also be offset to some extent by the opportunity the purchasing delay would provide first home buyers to increase savings and reduce the amount ultimately borrowed."

Reserve Bank Governor Graeme Wheeler says from October 1 banks will be subject to restrictions on high LVR housing mortgage loans. Banks will be required to restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the dollar value of their new housing lending flows. Due to exemptions the effective figure is expected to be about 15%. In recent months the Reserve Bank says banks have been doing about 30% of their new residential mortgage lending via high LVR loans.

'1-3 percentage points drop in credit growth'

Meanwhile, the Reserve Bank says a lack of data and previous experience with LVR restrictions in New Zealand makes it difficult to estimate the effect on credit growth and house prices.

"However, the Reserve Bank’s modelling, based on current high-LVR mortgage flows, suggests that the proposed calibration could result in 1-3 percentage points lower credit growth for the first year that the restriction was in place."

"This reduction is likely to come about through a combination of slower housing market turnover, reduced house prices and higher average deposits for house purchases. "

The central bank's sector credit data shows residential mortgage growth of $9.3 billion, or 5.4%, to $183.396 billion in the year to June.

Its modelling also suggests house price inflation could be 1-4 percentage points lower over the first year, the Reserve Bank adds.

"This reduction is expected to arise from reduced competition for houses, a direct lowering of the price that some purchasers are able to pay, and reduced house price expectations as a result of the restriction."

"For the most part, the international literature tends to suggest that the effect of LVR restrictions could be at the upper end of these indicative ranges in New Zealand, applying LVR restrictions to the flow of new mortgage lending would take a period of time to materially change bank balance sheets. Therefore, the impact of LVR restrictions on banks’ resilience in a housing downturn would depend crucially on how long restrictions had been in place prior to the downturn," says the Reserve Bank.

Further, it suggests, based on internal stress testing models, if LVR restrictions were in place for two years before a severe housing market downturn, they would reduce losses on residential mortgage loans by 10-15%.

'Too complex and costly to target geographic regions such as Auckland'

Exemptions from the LVR restrictions include;

1) loans made under Housing New Zealand’s Welcome Home Loans scheme;

2) bridging loans;

3) the refinancing of existing high-LVR residential mortgage lending; and

4) the transfer of an existing high-LVR residential mortgage loan to another residential property.

The Reserve Bank reiterated that, in principle, LVR restrictions could be targeted to particular geographic regions such as Auckland.

"However, the use of targeted restrictions is not contemplated at this point. Geographic targeting would be administratively complex, and would require difficult decisions to be made defining ‘problem’ areas," says the Reserve Bank.

"Furthermore, feedback to the Reserve Bank’s March 2013 macro-prudential consultation was that exemptions of large categories of borrowers, such as first home buyers, or more targeted restrictions, such as lending to ‘Auckland’, would be more complex and costly for banks to implement, and difficult for the Reserve Bank to monitor and enforce."

Wheeler yesterday said Auckland house prices were up 16%, year-on-year, with Christchurch prices up 10% and prices across the rest of New Zealand up 4%.

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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26 Comments

ALL of the reasons why house prices are getting beyond far too many kiwis need to be addressed, no good cherry picking one or two here and there

The banks ever increasing debt allowed for first time buyers is one of the biggest however.
regards

People keep saying that but I'm not convinced. I think it poses a huge risk to those people, and to the banks, but I don't think it is one of the biggest drivers of price. As evidence, this is what a graph comparing household debt to housing stock value is like:
https://www.dropbox.com/s/a18br8u56jbdsh8/debtgreenStockblue.png
(Household debt in green, value of housing stock in blue)
Prior to 2002, yes absolutely debt was by far and away the chief driver, since then it is just one of several factors.

No longer any need to examine theories, we're about to find out.

Yes, yes all will be well, as Big Daddy says rents will go from $500 a week to $800 in no time.
Your Landlord dreams that we'll see Sydney's record of 9 to 1 earnings to purchase price passed in a breeze and no meltdown...here comes 12 to 1!!!! you just cant lose!!!!
Psst...wanna buy some tulips? get in early, next best thing...
regards

steven, I am along-time PI and I am more than happy with these regulations.
Do I think they will make much difference? No...
...but I hope they do.

So the only hope for dissauding all of  those who do not need high LTV borrowing (investors generally and not just overseas ones) is that these restrictions will move the total market so that capital gain is curtailed or destroyed.
Pigs may fly!
Still we all know that property prices always go up maaaaaate.

I think you are to optomistic Gareth, ecconomists are to good creating selective 'facts'. The high-LVR will take a % of funds of the market that would otherwise be used to purchase housing.
I don't know what that % will be but for a bank or ecconomist (like yourself0, it shouldn't take to much figuring out to calculate that  if the market is currently X (say $10,0000,000,000 per annum), and the high-LVR resets the availible funds to Y (say $8,000,000,000) then:-
X - Y = reduced $ availible to compete for property.
It seems certain to me that high-LVR will result in negative capital gains for property, even though I don't have the selective facts to counter the steady as she goes, she'll be right arguement.  

Less competition - less price
 
This may look bad from the outset, but it will result in lower overall prices in Auckland. Property investors are up in arms over it because they can no longer sell their million dollar shacks to people that aren't fully loaded with debt from the banks. They're not happy that demand from people with no debt will decrease.

Definitely will see house prices ease to 2008 level.  Will also make it easier for many home owners who are looking to upgrade their homes, as family homes are more affordable in desirable areas.

Houses back to 2008 levels??...whose dream are you in!?
All that is going to happen is that the spike on the graph won't look so so sharp - instead of looking like a kitchen knife it'll look more like a blunt spade!!
We all know prices are still going to climb and they're not heading back to 2008, just as in 2008 they didn't head back to 2001.
Come on!!...the fundamentals all speak against it ...too much demand...not enough supply...positive immigration flows....shaky cities syndrom...finance aplenty from here and abroad....dadadedada....the list is too long!! 

PIs are NOT up in arms Muppet my friend.
I am a long-time investor. I am happy with any meddling these RBNZ guys want to undertake.
Let them interfere as much as they like. 

Sorry YL, I was more talking about investors as in speculators who rely on capital gain, not yourself who is obviously more a yield investor. The ones who rely on capital gain are pretty much going to get pwnd.

It would have been more complex to restrict the LVR rules to specific localities but that does not mean it would not have been worth doing. It seems quite wrong to limit opportunities for home buyers in parts of the country where property prices have hardly moved in five years because of rapid increases in Auckland.Most of the country is no where near a housing bubble that would threaten the health of any bank.
This would be about the best regional development initiative there could be. Younger people will be inclined to live in places where they can get on the property ladder and the economic activity and jobs are likely to follow them, particularly with work that can be done remotely .

I'm not convinced that house prices in the rest of NZ are any 'safer' than Auckland. During the UK recession, highly overpriced London had house price gains while the rest of the UK had big falls.
 

Simon-says - repeat after me "First-Home-Buyers" - now repeat 1,000 times
Are you feeling sympathetic yet?
Let me tell you there are two distinct groups of "First-Home-Buyers"
There are the local domestic home-grown "First-Home-Buyers", and then
There are .......... the cashed-up recent-arrivals

Twenty Percent House Deposits Bank and Real State Nightmare?
Well there is lots of conjecture, guessing, and second guessing as to what this 20% house deposit measure will do. So is there any factual information that may shed some light on the possible results. As it happens there is. Back in the nineties Japan was at the top of a huge house price bubble. I was talking to a Japanese economist last year and asked him how the Japanese government had got this situation under control. The answer, they limited loans to 80% of property values. “Any thing else” I asked? “No just that.” Over the last 20 years Japanese house prices have steadily declined. No wonder the banks and real estate industry is frothing at the mouth, this might actually work and turn into their worst nightmare!

.. is there any factual information that may shed some light on the possible results..
 
Ask again in 12 months.

A fascinating read over at the Gruaniad by Faisal Islam on the property boom in the UK, and some of its consequences (http://www.theguardian.com/books/2013/aug/18/default-line-extract-faisal...).
 
He writes very lucidly about the problem from a UK perspective (I can see quite a few parallels to NZ), and the 630-odd comments below make very interesting reading also, if you have an hour to spare.

 I like this comment 20,000 euro is $NZ 33,886 for 1000m2 section with utilities. So it is not just Texas that has cheap residential sections.

johnbig

18 August 2013 9:23am

 

The idea that house prices vary with the population seems very simplistic and I would like some information on new house prices. There seem to be several identifiable costs :
(1) What is the cost to in bricks, mortar, wire, pipes and labour to build say a three bedroom house with bathroom, kitchen and family room ? This should be pretty standard where ever the house is built.
(2) What is the price of say 800 square metres of land to put it on ? This obviously differs between say Kensington and Cumberland
(3) Whats is the financial cost in transfer fees, interest over say 20 years
(4) What is the cost of utilities, roads to the site, piped water drains electricity supply , and who pays this ?
In France where I live these costs are easily identifiable. A young couple setting up home would buy a piece of land (here 1000 square metres with pre-exisiting utilities can be had for say 20 000 euros). They would contact a builder and agree a fixed price say 150 000 euros. This would be financed with a fixed rate loan over 20 years at say 3%.
It would seem to me that in the UK the real unponderables are land prices and the rapacity of banks

 

Out of the cost of a brand new home there is the cost of development contributions, land, consent fees, construction costs, and labour and more. All of the above actually provides you with something tangible in one way or another. There is one cost that you pay for when you buy a new build that is not charged on second hand houses and that is GST. So for a new house and land package with a purchase price of $800,000 (the price you currently have to pay for a newbuild in auckland at present) you will be paying the government taxes to the tune of $120,000 that a purchaser of an existing home doesn't have to pay. If you took GST out of the equation that same house would cost $680,000. So there's a way to increase housing supply and improve affordability for new homes, exempt residential construction from GST. Or it could be a way to get first home buyers into a new house, similar to the capitslisation of child benefit that occurred in the 60s and 70s, except that they are exempted from the GST rather than being paid out the future cost of their child benefit as happened in the past.

This GSt on new buildings raises a big question of what is happening to the GST on the insurance paid rebuilding?
 
Has anyone done the GST calculation for the Canterbury rebuild. Say GST on $20? billion insurance payout being $3 billion in tax receipts to the government.
 
Is the government using this money to cover for their under insurance of hospitals, schools and the undercapitalised EQC? Or is this GST money being spent back in Canterbury on upgraded infrastructure? Or is the money being spent elsewhere?
 
I can see new things going to Auckland, other than the Southern motorway, which longest stretch without lights or roundabouts is a few kilometers I cannot see anything that isn't replacing like with like in Canterbury.
 
At the last election National said rebuilding Canterbury was one of their top three priorities. So is there any assessment by the media how the government is measuring up?

It will be interesting to see what effect these LVR restrictions have on the market as we must be starting to reach the end in growth of house price to income ratio.
Once households were single income, moving to two income households has allowed price to income growth in the past, but I would think this is fully played out now.
Then we move to smaller sections to keep things affordable.
And now lower interest rates.
What else do we have give without droping the standard of living?

That's a great comment, very lucid.
 
House-price growth from the 'average, wage-earning buyer' must be reaching the stops now (discounting those with lots of cash to spare; they're not in the same league).
 
But as you say, maybe it's like foodstuffs at the supermarket -- you still pay $5 for an item, but you get a "new superior flavour" in new packaging at 400g instead of 500g, and the manufacturers and retailers hope you're too busy to notice.
 
Except with housing, you now pay $6 for 400g, because of smaller and smaller sections!

exactly, the average joe's ability to pay these silly prices must be pretty much maxed out
but some (you know who) seem to think house prices still have a long way to climb

wonder what Ollie thinks...he predicted house prices doubling about a year ago