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RBNZ Deputy Governor: 'Earliest date' for beginning to remove restrictions on low deposit lending will be late this year

Property
RBNZ Deputy Governor: 'Earliest date' for beginning to remove restrictions on low deposit lending will be late this year
Grant Spencer, deputy governor of the RBNZ

The Reserve Bank says it will be "late this year" at the earliest before it begins the process of removing the 'speed limits' on high loan-to-value lending.

RBNZ Deputy Governor Grant Spencer said in a speech in Auckland today that the LVR restrictions, introduced in October last year, were "achieving their purpose".

"We are comfortable that the restrictions are so far meeting their objective of helping to restrain the demand for housing while supply gradually catches up. In so doing, we believe the restrictions are mitigating the systemic risk of a housing market downturn that becomes more likely as house prices and debt levels become more stretched.

"We also believe that the LVR restrictions have helped to make banks’ balance sheets more resilient to any adverse housing market shock."

However, in terms of when the LVRs may be removed, Spencer said: "We’ve stated that the LVRs are temporary, but before removing them we want to be confident that the housing market is responding to interest rate increases; and that immigration pressures are not causing a resurgence of house price pressures.  It will take some time to gain this assurance. 

"At this stage we consider the earliest date for beginning to remove LVRs is likely to be late in the year."

Meanwhile the Labour Party said the Government was missing an opportunity to "fine tune" the LVRs and apply them only to Auckland and Canterbury (see release at bottom of article).

Dampening effect

Spencer said that over their first six months, the LVR restrictions have had a dampening effect on housing that was "broadly in line with expectations".

"The easing or removal of the LVR restrictions will depend importantly on the restraining impact of interest rate increases and any renewed pressure arising from the net immigration."

Under the terms of the LVR limits, banks are restricted to committing no more than 10% of new mortgage lending to customers with deposits that are less than 20% of the value of the house they are buying.

The 10% limit was much lower than the banks had expected and the October introduction of the restriction saw them pull back almost completely from high LVR lending.

High-LVR figures shrink

Figures released recently for the first six months of the limit showed that, including exemptions, banks had loaned just 5.6% of their new commitments to high-LVR customers during that period.

There had been speculation in recent days and weeks that the RBNZ may be about to announce a loosening in the limit, speculation in part fuelled by a March speech from Spencer, in which he stressed that the LVRs were temporary.

He said that again today, saying that the restrictions will be eased or removed when housing market pressures have abated "and when we are confident that a resurgence of high LVR lending will not occur following removal".

Reduced effect

But he went on to say: "The LVRs are supporting monetary policy but they will have a reduced effect over time. Also, the efficiency costs of such restrictions will tend to increase the longer they are kept in place."

Westpac chief economist Dominick Stephens said he took the Spencer comments to mean that LVR restrictions "will not be changed in any way until late in the year - no change to the speed limit".

"However, an indicative timetable for removal of the restriction has also been set. Of course, this timetable is subject to change, particularly if the housing market takes off again. But in our view that is unlikely to happen, with interest rates rising as they are. 

"The RBNZ also commented on monetary policy. It reiterated that the pace and extent of OCR hikes depends on the data, and singled out two risks - the exchange rate and the trajectory of house prices in light of very strong net immigration. On balance, we took this as confirmation that the RBNZ is now looking at the less-steep trajectory for OCR hikes than it forecast back in March, owing to the high exchange rate," Stephens said.

Immigration concern

A recurring theme in the Spencer speech was the current strength of immigration numbers. The figures have been rising sharply and have exceeded the levels the RBNZ earlier forecast. At the current rate of monthly net inflow of migrants, the country is on track for potentially annual growth in net migration of 40,000, which would be close to record levels. Rising immigration levels put pressure particularly on the housing market.

Spencer said there were "many moving parts" to the overall housing supply shortage equation – and many risks around the prospects for reducing the imbalance.

"Probably the major risk at present is the outlook for immigration. After increasing substantially over the past 18 months, net immigration rose to 32,000 in the year to March, in part due to fewer departures of New Zealand citizens.

"The Reserve Bank forecasts this pattern to reduce gradually as economic conditions improve in Australia, which is the main destination for New Zealanders shifting offshore. However, cyclical turning points are hard to predict and there is a risk that the net migration inflow remains greater for longer, which would underpin the demand for housing."

Removal through 2015

ASB economist Christina Leung said that the RBNZ's timetable for removal of LVRS was "in line with our own expectations that the restrictions are most likely to be removed over a window from late 2014 through to mid-2015". 

"The RBNZ will not remove the restrictions unless it is confident that the housing market is slowing on a sustained basis and that interest rates will be sufficient to continue containing house prices, as well as confirmation that net migration is slowing. 

"We expect nation-wide house prices will rise 5% in calendar 2014 – with Auckland still up 9% - which suggests the risks lie more with 2015 given that Auckland is the market getting the most focus from the RBNZ. 

"We expect that migration flows will peak in the second half of this year.   There is the potential for the RBNZ to ease its way out of the restrictions when the time for relaxing comes by lifting the 10% ‘speed limit’.  But we think the RBNZ will remain comfortable for some time with the impact of the restrictions. 

"And, even though banks’ high-LVR share of new lending of 5.6% came well under the 10% speed limit over the first reporting period (October – March), there is some scope for the restricted lending share to lift very slightly," Leung said.

This is the media release issued by the RBNZ on the speech:

Housing pressures are easing gradually

Pressures in the New Zealand housing market are easing gradually but risks remain, the Deputy Governor of the Reserve Bank, Grant Spencer, said in a speech today.

“The volume of house sales has dropped considerably across the country, other than in Canterbury, and the slowdown in volume has also been reflected in prices.  Without the Loan to Value Ratio restrictions (LVRs), introduced in October 2013, annual house price inflation might be running some 2.5 percent higher,” Mr Spencer said.

Housing supply conditions have also started to improve, with a recovery evident in residential construction. In Auckland, progress is being made in freeing up the supply of buildable land and improving the consenting process. In Canterbury, the replacement of severely damaged homes is well in train after a slow start. 

However, the housing shortage remains large and significant increases in building are required in Auckland and Canterbury over the next three years.

“There are many parts to the housing market equation – and many risks. Probably the major risk at present is the outlook for net immigration, in part due to reduced departures of New Zealand citizens. We are forecasting net immigration to reduce gradually as economic conditions improve in Australia,” Mr Spencer said.

“We’ve started raising the Official Cash Rate, with the aim of forestalling general inflation pressures in the broader economy.  Floating mortgage rates could be 7 to 8 percent in two years’ time, closer to their average of the past 20 years.”

“The extent and timing of interest rate increases will depend on a number of uncertain variables, in particular the exchange rate and housing market pressures,” Mr Spencer said.

We believe that LVRs are achieving their purpose. The financial system is less vulnerable to an adverse housing shock and banks are now less exposed to potential credit losses as the interest rate cycle turns upwards.

We’ve stated that the LVRs are temporary, but before removing them we want to be confident that the housing market is responding to interest rate increases; and that immigration pressures are not causing a resurgence of house price pressures.  It will take some time to gain this assurance.  At this stage we consider the earliest date for beginning to remove LVRs is likely to be late in the year.

The Labour Party's housing spokesman Phil Twyford had this to say, in a statement:

Missed opportunity to relax LVRs

The Government is missing an opportunity to fine tune the mortgage restrictions which are locking so many Kiwis out of the dream of homeownership, Labour’s Housing spokesperson Phil Twyford says.

“Reserve Bank deputy governor Grant Spencer said today the bank believes Loan to Value Ratios (LVRs) are achieving their purpose, and with interest rates going up, these mortgage restrictions could be lifted later this year.

“Now is the perfect time for the Government and the Reserve Bank to agree that LVRs should apply only to Auckland and Canterbury, which are responsible for 90 per cent of house price inflation.

“Why should regional New Zealand continue to be punished for the Government's failure to fix the Auckland housing crisis and get the Canterbury rebuild happening?

“New Zealanders living in the regions are being hit with a double whammy. They have to meet LVR minimum deposit limits while mortgage interest rates are going up, adding thousands of dollars a year to their debt servicing.

“This is all because the Government refuses to crack down on Auckland property speculators and roll up its sleeves to build more houses.

“LVRs have been a shambles from start to finish with the Government not checking their impact on first home buyers until a month after signing off the restrictions. The Reserve Bank has also severely underestimated the effect on new builds.

“National refuses to take real steps to tackle the housing crisis like taxing speculators through a Capital Gains Tax or building large numbers of affordable houses.

“Only a Labour government will tax property speculators to take the heat out of the housing market and build 100,000 affordable homes through our Kiwi Build policy,” Phil Twyford says.

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32 Comments

Thank you Mr Wheeler.

Very good news indeed so keep it up.

Now I can crank up my rents until the pips squeak, safe in the knowledge that my tenants have no alternatives.

 

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a) Of course they do, they move to a cheaper rental. Given there is a 6%? vacacny rate and rents flat its an option I know renters around me are taking.

b) I think most are squeaking already, sure if you have chosen properties well in a high demand area.  Most rentals are however spread over a wide geographical area and price point as shown by the flat rents.

regards

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Unless his rentals are in Christchurch, where there is a housing shortage, then his tenants really do have no alternative.

 

For the rest of the country though you are right, he can only bring them a little above market rates without the tenants simplying moving to a cheaper rental elsewhere.

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Hi kimy, we hear a lot about rents (allegedly) not going up but your example shows where rents can go up without the stats reflecting it.  When your tenant went from $320 - $390 the agreement would have been made just between the two of you and it's likely that DBH weren't informed if the bond wasn't changed.  So all this talk of static rents is nonsense as most tenants don't want to leave their properties, because it's so hard to get another, and when their rent is increased it's not recorded in the official stats. 

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The cost of moving a 4-bed house locally is only around $1000. That's only $20/week so if your rent is being pushed up by more than this, then it is sensible to move round the corner to a cheaper rental (as there are so many of them these days).

 

My rental number research comes from looking at real rentals in my area over a long period. Can't remember a time when I had so much choice. This is a good thing as it forces lazy landlords to either renovate or drop prices.

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Yes Kimys one example where rent has not increased since 2009 ( a 10% drop in real terms) clearly shows the broadbased stats are wrong and rents are actually rising quite fast in 2014.  Oh no wait...

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Nice for some. I got one about 7 km's out from CBD which was empty for 2 weeks (although that was years ago while renovating and it's been fully rented the other 518 weeks)

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Hey big Olly, just secured a nice pad in MT Eden, landlord has modernised a villa. Also my rent has reduced but have to park my jalopy on the road. Never mind walk to the stadium and ride me bike. Saving, saving..and enjoying free weekends on the water. Now about those interest rate increases?

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Well done. Happy renters are a wonderful thing.

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Well done frazz. I just put the rent up 5% on a rental in mt Eden. Tenants didn't bat an eyelid. I do look after them though and then there's the car parks..

 

I'm fixed for 4.5 more years so these interest rate rises mean naught to my rental portfolio.  Do you think your rent will stay fixed for that period?

 

Might see you on the water this weekend then?

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Good work M' Mt Eden is a nice neighbourhood' should have brought there in the 80's. Sailing to Fiji tomorrow so next month perhaps.

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Just moved rentals on the north shore. Moved to a better area in a bigger house with high-quality fittings and I'm paying the same as I have been for the last 3 years and this one  includes gardening in the rent. Given that my salary goes up and rent does not, it gets cheaper to rent every year.

 

Shop around, it's a good time to find a rental.

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e

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Was that the first pip squeaking?

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 Excellant decision.

Keeping these LVRs; plus making 5 or more residential mortgages operate to commercial loan rules, plus further OCR rises will REALLY start to bite later in the year.

 

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Last hike in June, then a year of 'hold' as we 'assess the effects' and muddle through various world 'uncertainties'.  Meanwhile house prices keep rising, national get re-elected, and the long slow chch rebuild and auck building boom slowly gears up.

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dp

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Peak oil isnt an uncertainty and "muddle though" isnt a happening thing, unless by that you mean a see saw decline its here until oil is gone, circa 2030~2050.

Not so sure on National being re-elected, but its early to judge on that 6% drop.  As DH says Whinnie is close to 90% chance of being the King Maker.

I wonder who Whinnie detest the most?   National for taking away his seat or the Greens for being well Green.

regards

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And Winnie wont like Nationals recent embrace of foreigners but he'll also dislike Labour/Greens raising the retirement age, will be very interesting to see what way he goes and what price is paid for his support. 

 

MMP...  giving disproportionate power to a minority of voters and generally undermining the democratic process. 

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No, first past the post gave disproportionate power to a minority, National having a majority in parliment able to pass whatever laws they want when more than 60% of the votes were against them.

 

Proportional representation gives proportional power.  NZ First won't be rulling on their own with 6%

 

 

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So why isnt the migration being chopped?

Why do we need 40,000 more workers when we have 6% un-employed?

regards

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Rhetoric question.

You know the answer. 

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Non so blind as those who do not wish to look.

regards

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Not so sure Id say just how the migrants vote...also they have to be at least a perm resident before they can vote? or is it citizenship?

As DH pointed out, at  89% its a pretty high certainty that Whinie will be the King Maker.  Please your needs with him now.

regards

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Permanent residency and 1 year continuous residence to vote

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It should be 5 years continuous residence.

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That's called citizenship

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No, have to pledge allegence to the queen of england first.

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migrants tend to vote for the incumberant.  Especially those from Eastern style countries where voting against the people in power gets you in lots of trouble.

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Click on this link that I accidentally opened when on the NZ Herald page

http://about.hougarden.com/nzherald-760x120/

 

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Is that really any different to this link?  

http://www.rightmove.co.uk/overseas-property/in-New-Zealand.html

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Nope, just more, and I expect if I were to look for them I would them in French, Afrikaans, German, Spanish and Strine along with any other language you could chuck into the mix, and just more evidence that we are allowing ourselves to be sold up the river

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