RBNZ Deputy Governor Grant Spencer says the impact of LVR 'speed limits' will not be uniform around the country; house prices to stay high

The impact of the new "speed limits" on high loan to value lending will not be felt uniformly around the country, and house prices in NZ will remain relatively high, Reserve Bank Deputy Governor Grant Spencer says.

He also says the RBNZ doesn't believe that three-year targets for new housing developments in Auckland and Canterbury will be met. Also, he brushed off industry suggestions that the LVR limits might dampen residential construction activity.

Spencer told attendees at a Property Council New Zealand "Residential Summit" in Auckland that a more responsive "supply side" of the housing market - more new houses - was needed and this might include needing to import labour.

Not uniform

"The impact of LVR restrictions will not be uniform across the country," Spencer said.

"Market segments with a higher proportion of high-LVR borrowers are likely to see larger effects, as will areas where house prices and borrower incomes exceed the criteria for Welcome Home Loans, which are exempt.

"The LVR restrictions are intended to reduce the build-up of systematic risk in the New Zealand financial system.

"They will also potentially reduce the extent of interest rate increases, and hence exchange rate pressure, that may be needed in the coming cycle. The LVR restrictions are also expected to reduce risk in the banks’ balance sheets."

Record house prices

The deputy governor's speech came a day after latest Real Estate Institute figures showed the national median house price hit an equal-record high of $400,000 last month, while Auckland prices also achieved a new record median of $570,000.

The rate of house price inflation nationally is already very close to the 10% peak the Reserve Bank is forecasting for later in the year. Auckland's house price inflation is 17.5%.

But also out this week was the latest BNZ-REINZ monthly Residential Market Survey. This survey, completed after the October 1 introduction of "speed limits" showed a marked impact on the housing market, particularly among first home buyers.

The heated state of the market has been of concern to the Reserve Bank, which introduced the LVR "speed limits"  in an attempt to protect financial stability and to partially rein in prices - particularly in Auckland. See here for articles on LVRs.

The Government for its part announced new measures aimed at alleviating the politically-loaded situation of first home buyers being potentially locked out of the market by rising prices. In Auckland the Government and the Auckland Council have combined in the Auckland Housing Accord, through which it is aimed to build another 39,000 houses in the Auckland area over the next three years.

Prices to stay high

Spencer said it was important point to note that while house price inflation "should be reduced" by the LVR restrictions, New Zealand house price levels would remain high "on most metrics", for example, relative to incomes and rents.

"In this sense it is hard to see how these restrictions will materially reduce the existing incentives to develop new residential property. Provided the “red tape” costs and delays are reduced, there will remain a strong price incentive to expand the housing stock, particularly in Auckland and Christchurch."

The RBNZ expected that "in due course" housing supply would catch up with demand, and for demand to be further moderated as interest rates returned to "more normal levels" over the next couple of years.

"As the imbalance between demand and supply is reduced, we will look to lift the LVR restrictions," Spencer said.

"The indicators we will assess in this regard include house price inflation, mortgage approvals, credit growth and house sales. We will be looking for clear signs that excess demand pressures have substantially reduced and that a removal of the restrictions will not result in a return of such pressures."

Auckland unresponsive

Spencer said that while "many" dwellings were built in Auckland between 1991 and 2005, research suggested that, relative to population growth, districts in Auckland had the lowest supply responsiveness in the country.

"If we exclude apartments from the picture, the construction of new dwellings has been weak or declining since 2004."

The RBNZ estimated that for new housing targets in Auckland and Canterbury over the next three years, new dwelling construction would need to be 9% higher than at the height of the recent housing boom, "even assuming no growth in home building through the rest of the country".

"At the same time, a significant amount of repair work, infrastructure and commercial construction will be taking place in Canterbury.

"In reality, we expect the targeted house building in Auckland and Christchurch to occur over a longer period than three years. How much longer will depend on the extent of improvements in approval processes and on the ability of the construction industry to expand its current capacity."

Wage and price pressures

Spencer said some wage and price pressures would "inevitably result" from the ramping up of construction activity in Auckland and Canterbury.

"On a moderate scale, this would help to attract resources into the construction industry and hence facilitate the building expansion. On an excessive scale, this would risk spilling over into general inflation and put upward pressure on interest rates and the exchange rate," he said.

Spencer said that to avoid the potential problems associated with excessive house price and construction cost inflation, a more responsive "supply side" was needed that included:

• A responsive and innovative building sector;
• An adequate supply of labour, some of which will need to be imported; and
• A responsive planning and consenting process.

"We will also need the demand side to be kept in check while the supply response takes place," he said.