Reserve Bank Governor Graeme Wheeler explains his reasoning for introducing 'speed limits' on high loan-to-value lending

Graeme Wheeler, Governor of the RBNZ

By Graeme Wheeler

Many New Zealanders consider purchasing a house to be a rock solid investment, and assume that house prices will continue to rise steadily, having never seen a bear market or experienced rapid rises in mortgage rates.

Over the past 25 years, however, many wealthy countries have experienced periods of substantial decline in house prices.

Falling house prices erode homeowners’ equity, while mortgage lenders experience losses on their loan portfolios.

The resulting stress in the financial system can have long lasting adverse effects on the economy.

For borrowers, it can mean years of spending cut-backs to rebuild savings.

The greatest impact is on borrowers, often first-home buyers, who recently entered the market with the least equity. In the United States, real net household wealth for the median household fell 39 percent from 2007 to 2010, and a quarter of America’s mortgage holders owed more on their houses than what their houses were worth.

Our concern is that excessive increases in house prices in parts of the country, if unchecked, pose increasing risk for the financial system and the broader economy.

High and rising house prices increase the risk and potential impact of a major correction in house prices, and consequential loss to lenders.

In a severe downturn, such losses would be expected to significantly reduce banks’ willingness to lend. Similar views about the risks from our overvalued housing market are expressed by the IMF, OECD, and the major international credit rating agencies.

New Zealand’s house prices are expensive, based on international comparisons of house prices relative to rents and to levels of household income. And our household debt levels relative to disposable income – having doubled over the past two decades – are also very high.

Could New Zealand experience a sharp fall in house prices? While not anticipated, our economy is not immune to such risks. The world economy still faces major challenges and, if global growth slows markedly, or if China’s financial system experiences major difficulties, it would quickly feed into the New Zealand economy and housing market.

Prices rising rapidly

House prices are rising rapidly in Auckland and Christchurch for two reasons: housing shortages and easy credit. It is critical that issues around land availability, zoning restrictions and high building costs are resolved and that the housing targets in the Auckland Accord are achieved. It is also important that credit expansion is restrained to be more in line with housing supply. Restricting lending to borrowers with low deposits can help reduce the upward pressure on house prices, especially as banks have been competing aggressively for borrowers with low deposits – with this borrowing accounting for 30 percent of new mortgage lending.

Some suggest that loan-to-value restrictions should be applied regionally, especially around Auckland, or that we should exempt buyers of lower-priced houses.  We considered both options.  However, regional restrictions would be hard to administer and would shift housing pressures outside wherever the boundary is drawn.  Exempting low-priced housing would be a recipe for rapid increases in the cost of such housing. Broad exemptions to other groups such as first home buyers would substantially undermine the effectiveness of the restrictions in reducing house price inflation.

Many countries with LVR limits

While new for New Zealand, such restrictions have been introduced in 25 countries, and are currently being deployed in Canada, Israel, Korea, Norway, Singapore, and Sweden. Most countries adopting such restrictions prohibit high loan-to-value lending. We have opted for a more flexible approach, which still allows banks to do some high loan-to-value lending. Nor should such moves be seen as permanent. Restrictions will be removed when there is a better balance in the housing market and less risk that their removal will reignite high house price inflation.

While the Reserve Bank’s mandate is to promote financial stability, there are clear implications here for housing affordability. Over the next two years interest rates are likely to rise in order to restrain an expected increase in broader inflation pressures. We currently expect that the official cash rate could increase by 2 percent from 2014 to the beginning of 2016. This could result in interest rates on first mortgages of 7-8 percent. If the loan-to-value speed limit is unable to slow house price inflation, larger increases in the official cash rate would be required.

Supply is still key

We are keen to see house price inflation moderate significantly and, in doing so, reduce the risks to the financial sector and the broader economy. Speed limits on low deposit lending are designed to help achieve this. Loan-to-value restrictions are expected to give the Reserve Bank more flexibility as to when and how quickly we have to raise interest rates, but the more fundamental solution to reducing pressure in the housing market lies in addressing the issues around housing supply.

*Graeme Wheeler is the Governor of  the Reserve Bank of New Zealand

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?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.


Graeme : Does it not make sense to couple your new LVR limits with an increase in the OCR ?
... as you say , households have massive debt over property , a doubling in this debt over the last decade .... isn't it time to squelch the property speculation out of the system , to delberately bring on an economic slowdown , to save us from greater pain later ?
Isn't it time to reward the prudent investors who save money ?

By "prudent investors" do you mean those that got a free tertiary education, those that bought their first home for a few thousand dollars, those that had a job for life, those that are double dipping with a guaranteed pension benefit and are in paid employment, those that are sitting on massive capital gain from rampant house price inflation, those that have a tidy nest egg from charging exorbitant rents on multiple properties? 

Haha Animal Lover I assume resorting to a name calling diatribe without any knowledge of my situation means you've already lost this argument.
Some info to help cure your ignorance; I left a provincial school at 16 to do an apprenticeship - yes plenty of sh*t jobs. Then paid to put myself through tertiary education. Was self-employed for over 10 years, in NZ and abroad. Bought a business in Auckland and developed it. Own a million $ plus home in Auckland mortgage free. Have a Wife and 2 kids and... still in my 30's.
So not sure where you got bitter, chip, Princess, hopelessness, problems, from?

It was a dig at GBH that his generation has had all the winds at his back that I mention and now to top it off he feels he's entitled to a nice 9% interest rate on his accumulated wealth you SOB.

Folks, please refrain from personal abuse. Let's keep the debate/discussion civil. Here's our commenting policy -

LOL - it just gets better by the minute - I haven't had so much fun for a while.

Wow Gareth, Wheeler's a crowd puller for sure, way better than the endless property drivel from Olly........less defensive too.
 Anyhoo, did ya have to break up the brawl before it got started.....? nothing quite like a cyber stoush ta get the ol Boomer blood to racing.....can't put my finger on it , but that kaper used to be here as someone else on Bernards Boomer bash a regular and popular column.....ah those were the days.

I've only ever been kaper Christov, it's not a unique point of view and in this case was tongue in cheek. Interesting that those comments are more controversial than asking the Reserve Bank Governor himself to raise interest rates, I'm looking at it from a business owner, employer point of view not property.

Haha, now, this is really amusing, non-BB's attacking one-another
c'mon kaper, sounds like hand-bags at 50 paces
What generation do you think GBH is?
Then Animal Lover mid-30's, who is not complaining
What generation is that?
What generation are you kaper?

I said I'm mid-30's Gen above, so maybe you have us confused, and I have nothing to complain about :)

Hullo Mr kaper : The Gummster doesn't keep cash investments , I'm into tech & medical micro-cap stocks ...
... but I was thinking of retirees ( I'm a late BB , so very far from retired myself ) , for whom the interest on their savings allows them some extra cash atop their NZ Super ....
How they originally came by their savings is besides the point ..... merely that the current low interest rates is encouraging borrowing , and discouraging saving ....
P.S. ... I don't feel I'm entitled to anything .... but I am a Son Of the Beach  for sure .... in my hammock , under the coconut palms ....

Pleased to meet you Gummy, fair enough.
And the SOB comment was more a play on 'Animal Lover', attempted humour not abuse.

Prudent savers - like the first home buyers who are saving for a deposit

Oh the BBs? yes those. Far worse of course, they have used up all the cheap fossil fuels and much of the cheap buy iphones and "invest" now they expect to be carried in retirement by having present and future PAYE's guarantee their pensions and savings....and expect an un-realistic return to boot....
or maybe its stick the boot in.
Rents, well those have been its what ppl can pay.

A prudent investor is one who acts with care and thought for the future.  This describes the way one chooses to live, it is not a description of ones start in life nor of the general environment in which one finds oneself.

Kaper - to be fair if you and/or your parents are prepared to be taxed at a rate of 66% as my father was when I went to Varsity, you to can have a "free" education.  A nice little  statement regularly made by the younger gernration about baby boomers from a very uninformed position. And lets not go listing all the stuff the this gernration gets to do as of right now that baby boomers never did. Times change, situation change, best you adjust, read a bit and get on with what the situation is now.

Dont tell me GBH you have bailed from shares and are now in bank deposits?
a) No LVR is instead of OCR.
b) Squelch, so you are all for sending us into a mega recession and debt aka Ireland? cant see much worse than that, with your proposal.
c) So called prudent investors? gimme a break....these are just the ones who have done so well taking money out of the system while it grew and now expect to retain their gains at the expense of others.

So called prudent investors? gimme a break....these are just the ones who have done so well taking money out of the system while it grew and now expect to retain their gains at the expense of others.
Gotta a mortgage? Taking a representation of someone else's prior effort? 

Yes, forgoing consumption and investment in productive business due to unacceptably low returns on investment.

Then invest it elsewhere.

I am happy to lend to impoverished workers like yourself - I consider it a civic duty. That doesn't mean I should willingly accept too great a risk without due reward. You could always fund you own property purchases.

I consider it a civic duty
That's very counter cultural of you Stephen.  One might even say a 19th century ideal.

I find myself regressing to unfortunate actions associated with less fortunate times. The current, importunate political obsession to crush all that could be associated with socialism provides opportunity.

It's a sad day if duty or service to your fellow man is a regression.
As for myself, I could never be so materialistic as to be a socialist.

I agree. But the trivial habits of champagne socialists should not be confused with state provision for satisfactory education and health care for all. 

Quite true.  Big issues for another day, both.

Indeed, well you dont have to put your money in a bank do you?
Just where then do you hide your "gains"  businesses must be an even bigger risk....go for it, get 7 or 8% return.
PS overseas borrowers are happy to lend, going to be interesting if that ever changes, aka the Fed de-Qeing....oh boy will that be interesting....panic and carnage.
Personally, actually I have a 10% LVR so as such I would be at the lowest of risk profiles.....and thats the point in a way....some and indeed many ppl with > 80% LVR should be paying a far higher rate than myself, but of course we are all lumped in together as one risk profile.  Then like I said dont like it take your money out til the bank pays you more to bring it back.
In terms of self funding, well thats quite simple and as Nicole Foss has suggested house price falls when they happen could be down to what a FHB has in cash, ie about 10% of present QVs.

and I pay market interest rates, and dont expect a free handout or back stop, unlike depositors etc on the other side who expect  to be bailed out.

"Rising interest rates do not slow down a property market".
Trying to service a mortgage at 6% pa is very different to trying to service a 12% one.

So, rising interest rates do slow the property market down, - (a) by making the mortages harder to service, and (b) by slowing down the economy and, consequently, reducing people's buying ability...
This is not to say that interest rates is the best lever to pull when trying to slow the housing market down. The current rapid property price rise has been a supply and demand interplay result and as such not easy to tame quickly.
Anyway, this topic has been discussed ad nauseam by now.

I look at money supply growth over the last 30 + yrs....
House prices and nontradable inflation has mirrored that growth in money supply.
the CPI is a false God... in my view.  ( to use a figure of speech)
The thing that has not kept up....   and has actually declined in real terms..  (  using the CPI as the deflator)..      is the Average wage...
The average wage has not kept up...and now after 30yrs....  the nature of exponential growth rates has made the relative changes as obvious as the balls on a bull.. eg. house prices going up just 1% can be $60,000..
I don't think the Reserve bank nor most economists realize how tight things are for the average working family....
Globalization has had both positive and negative effects on our economy...  in my view.
Our kids are going to be sweating if mortgage rates go from 6% to 8%....  

Thats the whole point Zanyzane,
The Reserve Bank Interest rate policy is aimed at reducing economic activity in order to constrain wage rises. They market it as a means to manage credit demand by borrowers, but people borrow on the basis of returns, not cost. As long as return of investment is significantly more than cost, they'll not restrain their demand for liquidity. It appears that the Reserve Bank has finally realised this, though I think those so called macroprudential controls will be a dismal failure. Banks are not only one source of lending for those who wish to buy property, personal finance, and vehicle loans. There are many non bank financial intermediaries which could provide funds and that are currently exempt from LVR limits. 
The Reserve Bank is comfortable with its low Over night cash policy because they know about a fundamental structural change in the labour market which intrinsically restrain wage demands. Whilst the cost of education rises the real value of tertiary education is in severe decline, because after the Great Recession many recent graduates have been forced to seek jobs, which may have in the past been done by those who did not have a tertiary education. Why should the public be funding expensive higer education, if the jobs skill level demand have not increased? Those overqualified job seekers are crowding out those with lower qualifications and it cascades on down each tier of the labour market. 
"Although New Zealand’s Generation Y is not as severely affected as Europe’s so-called “lost generation” by the global financial crisis that began to bite in 2009, experts say young people entering the job market now are at risk of “labour-market scarring”, of being trapped in low-paid and less-secure jobs, with long-term consequences. And with many new graduates having to settle for less-skilled positions, those without higher qualifications are being pushed even further down the job queue.
Jason Walker, managing director of recruitment agency Hays, says he is seeing many graduates taking jobs in call centres and in administration and support roles, traditionally work that does not require a tertiary qualification. “They seem to be fairly grateful to at least get an opportunity as a first step to get into some sort of place of employment.” The situation has “flipped” from five years ago, when new graduates could expect to have companies wooing them. “Unemployment was at 3.6%. There was no spare capacity. You could not buy experience anywhere. So you needed to take on and train good people. Graduates became king. “They were called the Freddie Mercury generation – I want it all and I want it now. But that has changed. It was very much a product of the job market."
Added to this is the growth of a new category of workers, the precariat, those who are forced by economic circumstances and government policy into precarious employment with casual or part time contracts,  low job security and low wages.
Also this Treasury paper suggests that migrant inflow also has a marked influence on wage rates.

"Within the student population, New Zealand has the fifth highest proportion of its student body coming from overseas; roughly double the proportion of the OECD average.39

To gauge the extent to which the large proportion of migrants in its workforce influences 

New Zealand’s aggregate returns, we re-calculated the index by adjusting the OECD’s 

calculations to try to exclude the effect of the lowest paid new migrants. These new 

immigrants are defined as having lived in New Zealand less than ten years. To do this, we scaled up our aggregate earnings level to that of a non-new migrant’s by multiplying the aggregated earnings with an earnings index. The earnings index reflects the ratio of earnings of new migrants to the rest of the employed (Table 1) and is calculated as the ratio of the earnings of the employed, excluding new migrants, to that of all employed without the exclusion. 4 The results (Figure 11) show that adjusting the index by excluding new migrants closes the gap between New Zealand and the OECD average by 10% and 14% for males and females respectively. "


Banks are actually providing credit lines to marginal lenders, like they did before the collapse of the finance sector in 2007-08, before they pulled their funding due to the international credit crunch. 
The banks will be the ones reaping the rewards, whilst they push all the risk onto the second and third tier lenders and their investors. 
“In contrast to New Zealand’s past contractions, we are projecting a relatively long period of low growth. The length of the downturn is in part required to keep medium-term inflation under control. A key risk is that the downturn occurs more quickly than anticipated, due to a sharper slowdown in the housing market, further increases in fuel & food prices, or weaker export demand.
"Australian-owned banks are a growing force behind second and third tier lenders offering vehicle and personal loans to people who often can't borrow from the banks directly.
Banks such as BNZ, ANZ and Westpac are profiting from multimillion-dollar loans to smaller lenders servicing people with less than perfect credit records or low or irregular incomes.
Darryl Evans, chief executive of Mangere Budgeting Service, said in effect the banks were behind loans that earned them profits but which were not covered by the Banking Code of Conduct."

Zanyzane - our banks borrow considerable sums offshore in the form of currency swapped foreign wholesale liabilties to meet local loan demand beyond that supplied by local depositors - that interest on local deposits you talk of is also borrowed offshore. That's how our debts have doubled over the last two decades, as explained by Mr Wheeler.
And our household debt levels relative to disposable income – having doubled over the past two decades – are also very high.
And disposable income of the average Kiwi has risen how much in real terms over two decades?

Hey, go easy on the economist  monicker insults - I have no pretensions to invade their sinecures of skinless speculation.

1.  The public are not innocent.
2.  Speaking of blind, you need include other variables that contribute to disposable income; inflation is not the only one.  It would be impossible to blame one variable alone unless all other variables were completely constant.

rate are going up soon = save now and dont spend = consumption?
well the readers on this site tell me that the buyers are investors using deposits from other property. hmm?
I found this release interesting...    The picture I get is that the Reserve Bank is painting itself into a corner...   To me it is a sign that we are on the same road as USA and Europe regards to debt...  We are following in their footsteps and have not learnt..
The so called lowering of the "neutral " interest rate is simply a sign of an addiction to "debt". That our economy needs lower and lower interest rates after each recession to get any kind of growth...   
We can predict the end result....    because we are simply walking in the footsteps of other Nations.
Our next bad recession will result in  our own version of 0% interest rates and the liquidity trap... 
I might be over  dramatising a little bit to make my point....   

Yet whose doing the borrowing and uh, investing?  more and more it looks like financial sector is destroying the sectores that produce a good, ie business sector.

Auck council is borrowing $2.5 million per Day..... I wonder what other local bodies are doing..??
Watch farm prices Rocket as Farmers incomes rise...
Watch House prices continue to rise...
U are right ....   The financial sector will end up munting our economy..  The Banks will continue to make record profits .....

Kapiti is already at the max is could had to re-value the land under its roads so it could either borrow more or not breach its covenants.
The Q is what is that being borrowed for?
If its Opex then frankly we are ona death spiral to default and ratepayers are on teh hook for it.  Even if not its more can kicking...commiting a future part of the rates income to debt without the "asset" generating a return/profit.
Frankly it looks like it is nuts, but I have no real insite to how badkly councils are doing....I'd guess its worse than we can see, an iceberg effect.
Farm prices seem high already....I wonder on the banks continuing to lend willy nilly...but then ppl on bonuses will do anythign to get them....
LVR will have an impact on house prices as will investor nerves at some point...and those rises are only some suburbs...a very mixed picture.
"end up" personally I think the financial already has munted us....we are just a dead man walking kept on the drip in intensive care by the Fed....
Though I think their continued actions in the US and EU will indeed be the coup de gras
"A deathblow delivered to end the misery of a mortally wounded victim. 2. A finishing stroke or decisive event. [French : coup, stroke + de, of + grâce, mercy.]" Though it wont be a mercy thing....more parasitic killing the host.
All I can say is, thanks Raygun, Greenspan and Bush...etc.

Also, ask who the council is borrowing off,
The Q is when the councils default and I expect they will, how will pensions be paid?
Interesting thing, we seem to be eating ourselves / future yet we dont seem to be blinking...
hence why I odnt invest in the pension industry, I expect default and total loss.

Roelof, you are not wrong and you have powerful supporters such as Pimco's Bill Gross.
If you want to trust one thing and one thing only, trust that once QE is gone and the policy rate becomes the focus, that fed funds will then stay lower than expected for a long, long time. Right now the market (and the Fed forecasts) expects fed funds to be 1% higher by late 2015 and 1% higher still by December 2016. Bet against that. Read more
What's more:  Pimco shook hands with the Fed - and made a killing  Read more

Thks for the links....     good reading

Or more likely we have yet to learn that cripplingly high fossil energy costs is knee capping the world's economy..and will continue to do so from now on....and in fact get worse.
Lowering the neutral interest rate is a sign that other factors are now gaining, or are already dominant on their effects on the world.
We can indeed predict the end result, a Greater Depression, ie worse and longer that the 1930s.
So same end, different calculation to get there.

Solar panels do not provide transportation fuels readily and more importantly at an EROEI > 8 to 1. If there is one thign to take on today, make it that fact, its about the most important thing on the subject.
Steer clear of Meridian, well that depends on the Govn. If we were to follow Germany, yes the need to generate for the peak demand during the day disappears, bad news for SOE profits. 
This National Govn on the other hand is interfering with Chorus and ADSL line charges, artificially holding up ADSL pricing to make fibre look cheap.  Given they are selling Meridian as a cash cow then yes I think its a certainty they will not allow mass deployment of cheap solar panels infeeding....on top of they pathalogically hate renewables anyway...
Now if Labour and the Green's win it doesnt matter which ever way, Meridian will become a non-cash cow.  I'd watch the trends in the election polls....

Steven. The University of Haifa currently has a ferrous oxide solar panel, in development, that splits hydrogen from water.
Regards, Ergophobia

Hopefully this link'll work :

Good link gummy. But you will break Steven's heart.

Dont worry about my heart.....get your head around the ifs and buts and thats just the scientific angle.   Then get you head around the cost to deploy and land area and time needed to replace oil....base it opn 10% decline rate of crude oil per annum. Then look at the cost in terms of our present form of economy and the impact in terms of GDP.  Currently we go into recession when energy is >6% GDP, whats the cost % for this tech?  10%? 12%?
So, does it add up?
Now such a thing would take a huge study. One of the ways to approach that might be to say how much h2 per car per week. You would also need to replace/mod the car to run H2, dont know the costs on that. always.

Dont worry about my heart.....get your head around the ifs and buts and thats just the scientific angle.   Then get you head around the cost to deploy and land area and time needed to replace oil....base it opn 10% decline rate of crude oil per annum. Then look at the cost in terms of our present form of economy and the impact in terms of GDP.  Currently we go into recession when energy is >6% GDP, whats the cost % for this tech?  10%? 12%?
So, does it add up?
Now such a thing would take a huge study. One of the ways to approach that might be to say how much h2 per car per week. You would also need to replace/mod the car to run H2, dont know the costs on that. always.

Yep and read GBH's article for the ifs and buts....and thats just the technical issues let alone the land area needed to make the equiv quantity of h2 to replace oil and then get it safe to use as a transport fuel...then the scale, time and $s needed. Then tranport it, have a look at home hard natural gas is to transport as an example.....petrol is very tame by comparison.

ZZ.  Did you notice the other day that electricity demand went down by 2% but prices still went up.  Funny that,
I even remember from only a year or two ago when the price rises were being justified by the apparent great increase in demand. 
Never mind about Meridan.  The Government crony Monopoly will manage to keep prices up whatever happens. 
Also it will be interesting what happens if solar really starts to take off.  Probably a raft of regulations to shut down any independence of action.
Electricity should be about 40% of it's current retail price.
Power companies are now fudging on their legal obligations as well....  

A power companies legal obligation (is there really?) should be to its shareholders to make a profit.  So installing or re-installing a power line that will never return the investment makes no sense for the company and indeed NZ's economy. 

Yes Steven, your point is a good indictment of the Max Bradford's  electricity privatisation process. One could describe National government's market reforms as inept bungling, if one weren't cognizant of the fact that they fulfilled their objective. To deliver the New Zealand public into the hands of the corporate elite who aims were to extract extortionate economic rents for the sake of resuscitating the deflated financial markets after the collapse in 1987.
History has shown that the Labour Party's objections to the electricity market reforms in 1999 were fully justified.
I think there are far more important value metrics than merely price and return on investment, especially if you were as concerned with sustainability as you claim to be.
"The importance of influences other than price is proven by the experience of two American metropolises.72 From 1990 through 1996, Seattle City Light, which delivers the cheapest power of any major U.S. city, helped its customers save electricity via a variety of incentives and educational tools. Those customers’ smarter choices reduced their need for electricity at peak load periods nearly twelve times faster than
people in Chicago achieved, and reduced annual electric usage more than 3,600 times as fast as in Chicago, even though Seattle’s electricity prices are about half of Chicago’s. This behavior is the opposite of what conventional economists would have predicted from relative prices. But it proves that creating an informed, effective, and efficient market in energy-saving devices and practices can be an even more powerful
stimulus than a bare price signal. That is, price is less important than ability to respond to it. (The reverse is also true: Higher energy prices do not automatically yield major energy savings, even after long adjustment times. That’s why identical electricity-using devices and practices prevail in different cities that pay severalfold different electricity prices,
and why DuPont found identical efficiency potential in its U.S. and European plants in the 1990s despite long-standing energy prices that are twice as high in Europe.)73"

Um, well yes and no.  I agree the fiddling and execution has been inept. Was the concept? not so sure.  By this I mean making the SOE's work as a business is a good thing, whats failed was the in-adequate regulation but hen Labor etc was to busy enjoying the windfalls from it to change it....
Going back to the cost to connect, sorry bt if someone wants to live in the wop wops they should pay for the line there is no point or justification to run a line many kms costing 10s of thou to get hundreds back a year....that makes no sense economically for a nation/company IMHO...

Um, well yes and no.  I agree the fiddling and execution has been inept. Was the concept? not so sure.  By this I mean making the SOE's work as a business is a good thing, whats failed was the in-adequate regulation but hen Labor etc was to busy enjoying the windfalls from it to change it....
Going back to the cost to connect, sorry bt if someone wants to live in the wop wops they should pay for the line there is no point or justification to run a line many kms costing 10s of thou to get hundreds back a year....that makes no sense economically for a nation/company IMHO...

Glad someone brought up the neutral interest rate info.
And here's an interesting link:
Another article from George Soros

Governor, I suspect that this round of LVR restrictions might slow down the new housing supply and I was wondering if the Reserve Bank  have considered or would consider exemption for purchase of new home -first home (first home buyers buying a new home)? Thanks

Maybe....      (that is... slow down supply )
As things stand... the Law of Supply and demand  suggests that  the only way to generate greater supply is if prices go higher.
At some point Developers will step up to the plate becauses the risk/reward balance swings in their favour..
As u can see...   change comes slowly at the Beauracratic level.... things stand...  higher prices will =  higher building consent approvals.
I think it was Bob Jones who talked about the ..."Gap"...       ( the diffence between the cost of a new development  verses  the price of current stock )

If however we are in a  x2 bubble already then will such ever occur?

I vividly recall a certain Chairman of the Federal Reverse in America , who during the span of his leadership would go green and mutter " irrational exuberance " anytime the markets overheated , and looked toppy .... but he took no action .... he kept feeding coke to the addict , kept the bubble inflating ....
... until   KA-BLOOOOOOOOOOOOOM !!!!   .... the wipe=out , the GFC ... but not on his watch , he'd off-loaded the ticking bomb quicker than an Irishman playing " pass-the-parcel " in a Belfast pub ....
Graeme Wheeler has taken one small step towards averting that disaster happening here ...
... help from the councils in freeing up land for development , and from the government in reducing red-tape , would assist him immensely ....

Wheelers approach in terms of maintaining the integrity of the banking system is correct, but the causes of the house price increaes have not evaporated , in fact they are still present as strongly as ever.
Its now up to the Keystone Government to  find an holistic approach to sorting out all the other complimentary issues affecting housing , inter alia

  • An Immigration Policy with 90,000 new arrivals per annum
  • Interest Rates that are so low as to render a mortgage cheaper than renting the same property.
  • Tax free Land Banking ( Vacant residential sections should be subject to double rates)
  • The administered costs of subdivision by Local Councils
  • The restrictions on Auckland growth because of arbitrary boundaries


Interest Rates that are so low as to render a mortgage cheaper than renting the same property.
Not true in my suburb on the North Shore. Interest-only mortgage is 18% higher than rent on same property. Add in rates, insurance and 1% maintenance charge and renting is 40% cheaper

Mr Wheeler,
Keep talking.  A good word in the right circumstances is like an apple of gold in a setting of silver.

A good deed, more so.

It has been noted that in the absence of the truth people are inclined to believe just about anything.



"Barfoot & Thompson reports record $657,912 average house price and record $600,000 median price"
In September B&T's median sales price hit $600,000, which was a whopping 6.9% increase, or $38,500, on the August median.
 Poor Mr Wheeler is pushing @@@@ up hill.
 and  "jaw-boning" the market while he is at it.
Not even he can control the free market, LVR's or not.
If people think that properties are rising by thousands each month, whatever interest rate is charged won't make any difference.

Not even he can control the free market, LVR's or not.
Jeepers, take the blinkers off - it's funding from foreign sources with zero bound interest rates imposed by G3 state-controlled central banking institutions that we rely on to top up our meagre local deposit reserves ~ $40 billion of that printed foreign command economy dosh drives up the higher real estate property prices you mention.  

Stephen Hulme,
This state of affairs prevailed well before the Great Recession and is arguably a major contributing factor. 
"The background for this policy action is one that I've explained to regular readers of this blog repeatedly. Namely, that China's irrational decision to keep the yuan grossly undervalued requires it to amass such enormous amounts of foreign exchange reserves that creates massive excess liquidity."
"The most aggressive experiment in monetary policy ever conducted is now under way. Japan is printing yen in order to buy dollars in such extraordinary amounts that global interest rates are being held at much lower levels than would have prevailed otherwise."
A blogpost on the Council on Foreign Relations website also rebutts the common belief that its the U.S. government whose responsible for the massive international monetary growth.
"That deficit isn’t financed by private capital flows either. Accurate data on official flows isn’t available (the US data understates official inflows). But I am confident that the increase in the assets of central bank and sovereign funds is on track to be around $1.5 trillion in 2008 – evenly split between the oil exporters and China. Even if only half that increase is held in dollars, it would be roughly enough to finance the US deficit if private inflows and outflows balanced. No one can credibly argue that the large US deficit is a fully market outcome, one produced by strong private demand for US assets."

Wonderful chap that Stefan, good to see him getting some recognition for clear thinking.

If you think the "market" is free - try missing a car payment and see what happens.

What do you think should happen?  Are you saying that a "free" market would be one in which individuals are free to decide whether or not to abide by the terms of a contract they've entered into?

A light way to point out no market is free.  Every market is an artificial construct.
Without a correct definition of what freedom is we could not say whether breaking a contract is freedom or something else.

It's nice of Mr Wheeler to try and explain his LVR experiement to us simpletons.. But it looks a bit like he's trying to justify the move in light of the "unintended consequences" (call them intended if it makes you feel better) and negative response the policy is receiving. 
Right action requires no explanation. As they say the proof is in the pudding. 

If you look at places with an LVR it has been fairly successful in achieving its aims, but it seems no one wants to look....

Did those places have housing shortages that weren't being effectively addressed alongside strong immigration? Did those places have tax structures that make property investment the single most logical investment choice over all others? Did those places have a major earthquake that removed thousands of residential units from the market? Should I go on?

I said fairly succesful, I didnt say it stopped rises. Even before the earthquake we had seen a bubble price rise.  The single biggest multiplier I can see is the ability of the FHB to pay more, which is leveraged on up the housing ladder. Stop that increase and you cool the market.
I mean do you really think 20 years ago a 80% LVR and 25 years moving to know 95% and 30 years has had no significant effect?
In terms of rises, well rentals are not earning more, if they were climbing, yes there is genuine demand, but its flat.....therefore just what is tulip mania and what isnt.
Yes sure go on if you want....simple there are enough Qs around this to wonder whats genuine price rises and what is specualtion on the greater fool.
Now sure chch is different, but thats finished as a major city anyway.

I said fairly succesful, I didnt say it stopped rises. Even before the earthquake we had seen a bubble price rise.  The single biggest multiplier I can see is the ability of the FHB to pay more, which is leveraged on up the housing ladder. Stop that increase and you cool the market.
I mean do you really think 20 years ago a 80% LVR and 25 years moving to know 95% and 30 years has had no significant effect?
In terms of rises, well rentals are not earning more, if they were climbing, yes there is genuine demand, but its flat.....therefore just what is tulip mania and what isnt.
Yes sure go on if you want....simple there are enough Qs around this to wonder whats genuine price rises and what is specualtion on the greater fool.
Now sure chch is different, but thats finished as a major city anyway.

Steven - LVR is the wrong tool to be using at this time.
If you had an over-supply of housing and price increases then the LVR may be the suitable tool to use.

Agree. Even though house price inflation is higher than most are comfortable with anything that restricts the supply of new houses seems detrimental to getting beyond this problem. 

Why not then exempt new builds then?  Wouldn't this drive the supply side that is needed as first time buyers would be forced to build thereby increasing the housing stock?

Odessakiwi - There are currently too many regulatory constraints on new builds which has driven costs higher. Existing house prices have risen simply because they had room to catch up to the new build prices.
First Home buyers are not the drivers of new builds. In general new builds have been too expensive for them. Think of a generational transfer of house stock when more financially secure people build a new house and sell their existing one to a FHB. The more financially secure are not going to build something costing e.g. $500K when they can only get $400K for their existing property so they have to wait for the price increases to take effect.
Generally you have to buy and sell in the same market.

Well apart from being brought in 15 years or 10 at least too late, no I dont agree.

All policies require explanation to someone.  Not always everybody, but more often than not in the current democratic method of government.
And best not to include everyone here as a simpleton.  However you may feel about yourself there are those who, whilst recognising we are but worms may feel we are at least glow worms.

Thanks Ralph. I thought the explanations should really come during the feasability stage. Rolling them out after the policy is enacted seems like an attempt to justify on the back foot to me. I do like Wheeler's style so not an attack on him. 
And yes apologies for the simpletons reference. You are quite correct I was just referring to myself, not all the learned folk on this site of course. Very happy to be a simpleton. As someone not so long ago pointed out to me, it was almost exclusively the MBA club boys that created the conditions to bring about the GFC. Very happy not to be included with that mob of geniuses! 

No offence taken.
I liked the position of the UK newspaper magnate Robert Maxwell who argued with his sons they should *not* go to university for an MBA - on the basis that nothing worth knowing in business can be taught.

Ralph - I also like the postion of Robert Maxwell on this topic.
Personaly I draw a distinction between Qualification and Education.

As a university dropout I am perhaps not *perfectly* balanced in my opinion on this particular matter.

Yes notaneconomist - and also a difference between information and knowledge. One of them = power. Not sure which one in this day and age but have a personal preference for listening to people in possession of the latter. Making the distinction is where so many go wrong. 

I suggest to you that only the *application* of knowledge is in any way powerful.  Even then, if knowledge is applied incorrectly it is reaps the unexpected harvest.

You mean like knowing how to split an atom, and then use that knowledge to throw a nuclear bomb or two onto a city?

Machiavelli.......nail , head , hammer, on the money with that.
Unintended consequence, does not include the unforseeable, nor the unavoidable, it just means......
I didn't mean to hurt you......but I was always going to.

Is the new governor going to repeat the mistakes of his predecessor? He has a short window of opportunity to stop the madness, will he grasp it? I think not.
I thought Rodney Dickens' thoughts were relevant. The previous governor waited too long before putting interest rates up and then redeemed himself by cutting rates rapidly when the international crisis hit.
Governor Wheeler is essentially waiting for international interest rates to rise before he follows suit. He has already allowed the momentum in the Auckland housing market to re-ignite, and his LVR limits may be too late. Too little too late, followed by too much too late was what happened to the previous governor.
It may not matter so much what he does but that he acts to stop the bubble now. Increase the danger rate of equity reserves the banks must hold against mortgages would be my favourite, he is entirely justified in ramping that up as an emergency measure, it is way too low. Make the banks publish clearly in branch windows how much real equity reserves they actually have. Get serious about making banking stable and stop being such a whoose. Make bank lending less than deposits. Get real and cut the fluff and lies about banks being safe. They are the most leveraged businesses in the world.

"Get serious about making banking stable and stop being such a whoose. Make bank lending less than deposits"
So borrow a mil and deposit it getting a better rate? Nice gig if you can get it, adds new meaning to the word arbitrage, not sure the banks will run with it though.

No, my meaning is that the bank should only be able to lend out up to 100% of deposits, not 140% or whatever silly figure the fools are allowed at the moment. It is a simple and critical requirement if you actually want a stable banking system. Banking is not rocket science, they only make it seem so.

It's actually "wuss" Roger W,an abstract form of pussy I think.

Interesting.  No doubt some archane reference to Mr Wheelers love of cats.  I wonder how Roger knew about that?

.. there's another meaning to the term " wuss " , Count .... " weekend sh*t syndrome " ...
I kid you not ! .... it refers to the occurrence on weekends of having a sudden bowel movement , due to the consumption of XS alcohol ...
.. oooops , hav'ta run , gotta wuss coming on  ....

Thanks for that, mi spelling is a bit wobbly.

If you start the day with a heaping bowl full of gin infused prunes in porridge , as we do , you may get the rare double of a woosh & a wuss all rolled into one .... or in a " number two " , to be precise ...
.... but we're good all rounders here at , and such things as wobbly spellink or an errant " wuss " are a mere bagatelle , on our way into the glorious fun filled day of house hunting and mortgage fixing ...

Don't forget the ranting. I like the ranting. A fun filled day of house hunting, mortgage fixing and ranting. Or should that be renting in kiwi speak? I get confused.

I like the sound of this idea BM - "Vacant residential sections should be subject to double rates"

Great idea if you want to reduce the supply of new sections. You should work for council.

Well it could kick in after a set period of time if the section remains undeveloped.

But it is not vacant, my accountant assures me I get a rental payment from the neighbour for parking his trailor in it.  I seem to recall the amount may be the same as I pay him to park my trailor on his, no longer vacant, lot.

It will be interesting to see if anyone from the RBNZ actually engages in the discussion, I tried to engage the deputy at a recent meeting in Nelson but he ran back to Wellington before the tea and biscuits afterwards. Being in a room full of hostile exporters would be good for them. They really do need to get out more.

I have found the analysis people at the RBNZ striaghtfoward and timely to deal with. But I was not asking for an official postion or interpretation on anything, we were just discussing data. 

Yes, I think they are serious and knowledgeable, but all their ideas come from the same place.

'House prices are rising rapidly in Auckland and Christchurch for two reasons: housing shortages and easy credit.'
If you have a housing shortage then easy credit assists in resolving the supply problem.
Easy credit in an over-supplied housing market would see prices decline.

Evidently this is over simplified.  We DO have easy credit, we DO have a housing shortage - but the one has NOT assisted enough to resolve the other.

Sorry Ralph I'm guilty of over simplifying......and you're correct...."one has NOT assisted enough to resolve the other. Government needs to urgently address the other issues that are an impediment to the supply side i.e. Councils, RMA etc.
It think the LVR's are going to cause serious price distortions which will have a negative impact on the wider economy. LVR's are the wrong tool to be using at present.
If I were to implement an LVR to contain a market I would use it when there was an over-supply of housing with easy credit and rising prices due to the easy credit OR if I had information that there was going to be deflation in prices.

The whole article as others have pointed out seems to be a sledgehammer approach. The housing issue is a complex one beyond the supply and credit cost issues. People buying a house as an investment (to rent out) don't have to pay commercial rates on their loans (although their purpose is essentially commercial), and international investors do not have to apply to own a piece of NZ property.  
Has the RBG been sucked in by the poular hype proagandered by the media?

If this targeted policy is a sledgehammer then an interest rate increase on the whole economy might fit the description of one of those hydraulic post hole diggers they hook up to the back of a tractor.

As others have noted, tiered residential mortgage upward risk weighting adjustments (page 47 of 108) could have been implemented without much fuss - did banks forecefully demand their return on capital remain extortionate?

Perhaps Mr Wheeler whould comment on that specific point?
Did they consider upward weighting adjustments to risk - and - if they did why did they not choose to make that an instrument of policy?

Not to mention the stuff up they have created re collateral or lack thereof. The silly incompetents have made sure that the money centre banks get paid and we get done. Where is my collateral, that's what I want to know. If the bank lends me money I have to find collateral, but if I lend them money the RBNZ make sure I get no collateral. What were they thinking?

Sledgehammer? Or a very small waft from a distant airbrush? I suspect the effect will be minimal except on those directly affected. The danger is it makes it look like they are doing something when in fact they are still ... soundly asleep.

Its good that Graeme Wheeler has done something to cool the housing market starting with first time buyers, however he should extend this with some 20% tax on purchases with people with 2 homes or more. I doubt this will work as there are too many politicians with investment in property who don't want to see the value of their homes decrease.  Graeme is very much worried about negative equity in a couple of years time when rates are up a couple of percent. Affordability of rising rates and less money to spend in the real economy when rates go up. Canada, the UK, New Zealand and Australia are all showing the one trick pony of rising house prices. People In Auckland on average have earned more on the rising value of their house in the year than they did in their salaries at work.

Common people, CGT will do squat to the housing bubble - look at Aust as an example, they have the same problem of high prices and they have CGT since the late 80s.
CGT is just a vehicle for the Govt to gain more revenue and votes bribery, nothing else.  What we need is making it easier to build new houses i.e stop the bottle neck at Council issuing permits!

Common?  I think not.
I am a totally and utterly unique individual in every respect.  Just like everyone else.

ooops blame the new Smart Phone auto correct.  Now how do I turn off auto correct on a the Sony Xperia phone?

CGT creates a perverse incentive for government policy that generates capital gains. Popular in places like California, Uk, Ireland, and Spain I believe.

My sincere congratulations to you Mr Wheeler, it wasn't easy, it wasn't something that came naturally to you , unlike Bolly, but you have finally nailed the both deeply concerned and overworked look your predecessor would front up to announcements with.
Well done from me, and I'm sure Bolly would be a tad jealous, because I think you've just mastered this look.
 Have a ladyfinger on me or is it back to lamingtons.

I say, that's a bit harsh. I think Mr Wheeler still gets the benefit of the doubt, he seems like a good chap so far. I am concerned it will take him far too many years to adjust to the small, boom and bust economy we have here. Took me years, lots of subtle differences, mainly due to the small population. The upside is that a small boat is easy to turn once you get the hang of it. I've been trying to goad a response but no joy as yet.

Mr Wheeler, 
Thanks for taking the time to post your article.
Can you please answer one question: Why is the average person's biggest expense (namely the cost of putting a roof over your head) ommitted from the CPI ?
It seems to me that the biggest cost for a person is housing, and I cannot for the life of me understand why it is ommitted from an index that is supposed to capture the cost of living.

because it isnt.
consumer price index, consumer, someone who consumes....a house isnt consumed...its still there and its classed as an rates, maintainance, power, yes sure.
Lots of definations on it, just google...
I mean if you rent, well rent hasnt gone the cost of living for some has not increased.  If you are a landlord the cost hasnt gone up, your capital paper value is higher but it costs you no more.

A house to live in is not an investment. It has no finantial return. It's our biggest cost and it's not included?  BOTH rental costs and house values should be taken into account. 
If it was, we wouldn't be in this housing afforabiliy mess, it would be self leveling.
With a stroke of the pen Mr Wheeler could change this without penalising first home buyers.
There needs to be something more in the finantial system that stops idiot kiwis from enslaving themselves to banks due to ridiculus house prices. 

You are correct , Mr notch : A house is an item of consumption , and we are being lied to when it's not included in the CPI figures ...
... whether you rent ( the minority of Kiwis ) or own a house ( the majority ) you're throwing money continuously into a non-productive asset ...
[ no reflection on the personal pride of homeownership here , just looking at the bare economics of it ]

ay? how about money I spend on transport modes (car, bicycle) so that I can get to work, to earn munny? Is that an investment that I get a return on, or just outright consumption? They are included in cpi yes?
Are the portion of my rates that are used for creating/maintaining useful assets just consumption or not?
The divergence of house pricing and cpi adjusted salaries is just a big con job on the masses.

As an MBA (FWIW) ah do dimly recall two approaches to strategy:
- plan, plan, analyse, plan some more, perfect the thing, then act.    This is currently the default Gubmint and TLA mode, which generally goes under the rubric of 'Transparency' or 'Consultation'. 
- do any old thing, Right Now, and tune it according to the response received.  In military terms, this is called 'getting inside the enemy's OODA loop' - read Stratfor for much, much more.
The first response tends to do the mostly right thing, a decade or so late.
The second response is fairly much what's used by agile or even solvent businesses.
I think Mr Wheeler's action, being prompt, certainly causing a monitorable reaction, tends to the second strategic mode.
Which, IMHO, is a Good Thang.
As long as he is prepared to monitor and tune....