English and Ardern raise concerns with RBNZ's loan-to-value ratio limits, and debt-to-income ratio work, while 'respecting' RBNZ independence

By Alex Tarrant

The Reserve Bank has been the target of what could be argued are veiled threats from both major political parties in the lead up to September’s election about its on-going imposition of loan-to-value ratio (LVR) restrictions, and warnings that debt-to-income (DTI) ratios are not political flavour of the month.

Prime Minister Bill English and Labour Party leader Jacinda Ardern maintained they would respect the Bank’s independence. But both on Tuesday morning hinted at dissatisfaction over how LVRs were impacting first home buyers.

Their comments come after the Real Estate Institute (REINZ) last week called on the Reserve Bank to remove LVR restrictions on first home buyers. You can read David Hargreaves' take on that here.

First home buyers in focus as election nears

On LVRs and DTIs, English was first up on his way into the National Party’s weekly caucus meeting in Parliament Buildings. Asked his thoughts on whether it was still appropriate for the RBNZ to be imposing LVR restrictions, he replied that was a matter for an independent Reserve Bank. But he also encouraged the Bank to at least have in mind what economic conditions would allow for removal.

“They put them in place. I think it’s pretty clear now that the market is, [with] that policy along with a number of others, has got prices flattening off – takes a bit of pressure out of the market,” English said.

“The Reserve Bank makes those decisions according to their views about financial stability. So, I would expect that they’re doing work on what conditions would have to be met to remove them, but there’s no indication at the moment that they’re going to.”

English acknowledged the macro-prudential tool had made it tougher for some first home buyers. “It was designed to put some restrictions on that, and it seems to be having its effect.”

This was why government was helping this class of buyers through HomeStart grants and by allowing KiwiSaver withdrawals; 30,000 first home buyers had taken advantage of this so far, and there was enough funding for another 60,000.

“In time, you would expect that the LVR restrictions would be looked at by the Reserve Bank. So far, there’s no indication that they are,” English said. “In my meetings with them I’ve said to them that I would expect that they’re thinking through what the conditions would be. But it’s their decision…”

Asked whether he thought the Bank needed to be thinking about ‘taking a break’ on the policy: “Well a good regulator would do that. If you bring something in as a temporary measure, then you should be clear about what’s involved in removing that.”

Was that comment a message to the Bank? “They were always meant to be temporary measures, so they need to think about what conditions would be in place to remove them. But I have to say, there’s no indication at the moment that they’re going to remove them right now. And the market…is flat and in some places falling,” English said.

However, he again reiterated that relaxing LVR restrictions was a matter for the Reserve Bank. “I’m not here to tell them what to do.” English said government was not going to make the decision for them and that he did not want to give the public the impression that politicians could decide to remove them. “The Reserve Bank decides that.”

Housing market correction

Meanwhile, English welcomed the recent correction in the housing market, with annual price rises falling from near 20% annually to near flat currently. “We’re seeing some sort of correction, we’ve yet to see how it will flow out,” he said.

“Some real estate agents are saying that, because of the election, that’s prolonging what would usually be a quieter winter period, and that prices might pick up again after the election. That might depend on the certainty or otherwise of government policy.”

A flattening of the market meant a bit less panic for people looking to buy, English said. “I think it’s a good thing that prices have flattened out. Everyone gets a bit of time to think about what they can afford, we’re able to get on with supporting the building of 200,000 more houses over the next six years, and gearing up the infrastructure that goes with that.”

That there had been a correction in the New Zealand housing market was “pretty obvious,” he said. “Prices were rising at 15-20% per annum; they’re now rising at – it’s pretty much flat – and I think that’s progress.”

Asked how long that would have to last before he thought the Reserve Bank could remove LVR restrictions, he said: “You’ll have to talk to the Reserve Bank. But it raises the question of how long they will be there for. It’s important that the people who put them in place have thought through the conditions under which they remove the LVRs, because, ideally, they are not a permanent feature of the market.”

English was then asked on his views of the Reserve Bank perhaps imposing debt-to-income ratio limits. He acknowledged further tools were being examined, and if there was a need for them the government would be open to it. “But we don’t see the need at the moment,” he said. “We won’t be looking at them before the election.”

‘Labour never favoured LVRs’

Labour’s Ardern said she had heard plenty of personal stories from individuals who had really struggled to buy a first property because of the existence of LVRs.

“We’ve never favoured them, but we’re also very clear that they’ve been introduced by the Reserve Bank because not enough has been done by the government to ease the pressure on the housing market. So, this is something that they’ve made a decision on because of that inaction,” she said.

“We’d like to see them gone but we’re not going to remove the independence of the Governor of the Reserve Bank.”

On DTIs: “We’ve never favoured them either,” Ardern said.

Labour would focus on removing the circumstances under which the Reserve Bank might feel it had to use macro-prudential tools by easing the pressure on the supply side through initiatives like Kiwibuild.

“But we’ve not proposed removing their ability to set those…use those tools,” Ardern said. “We’re not taking away their discretion and independence.”

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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153 Comments

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But surely it is not the existence of LVRs that are the problem, but the extortionate price of housing? It's a bit like saying we must get rid of chemotherapy, but saying nothing about the cancer.

If some of your citizens have cancer do you dose the whole population with chemo? Thats whats making govt unhappy.

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The initiative to lower LVRs is driven by the REAs, who can see volumes declining and their jobs disappearing, and the national party, who basked in the glory of rising prices and fear the political risks that go with fallling prices. To prop up a falling market they propose loosening lending requirements for the most vulnerable set of borrowers in that market, FHBs, with the clear intention to induce those FHBs to support demand and buy into that falling market with smaller equity and greater leverage than they would otherwise have had.

That's what is being proposed. And you're fine with that? Shame on you.

FHB should always have been exempted. The biggest impact on FHB was in 2013 and 2014, exactly when they should have been buying.

Some would have brought in 2013 and 2014, FHBers aren't just made for just one time , they do come on all the time as they get to a age or save a deposit, problem is every year they saved the house went up more making it impossible, not there fault

Sad bloody sad, pick on the weak FHB to save them, disgusting to suggest putting FHBers in more dept, sometimes I feel like pissing off from this country

Yes, similar to opening up lending to those who can't afford it, anyone remember sub-prime lending and where that took the US housing market, and then the world economy!

Yes you are right and people need to be hit where the problem is and less for others, so if housing isn't affordable maybe we should just split the LVRs up more, say first home buyers 5 or 10%. , other home owners 20% and investors 20% for there first rental and 40% above that, and a capital gains tax on houses sold under 10 years

Nice analogy. What it does show is that the leading candidates to head the next NZ govt are both afraid of saying the wrong thing to make the flock feel insecure. They need to inspire hope from a number of angles: from the starry eyed who dream of a suburban comfort zone to those who have staked their claim and are banking on their suburban castles and their right to reap the rewards that they feel they deserve.

..it is not the existence of LVRs that are the problem, but the extortionate price of housing?

I can refine this a little:

  • it is not the existence of LVRs that are the problem, but the extortionate price of housing LAND
  • And That's down to planning, zoneration, MUL's RUB's and other Brit Town & Country Planning Act fads
  • Which restrict Land Supply and impose non-tradeable costs on the land which can be developed and sold
  • Which in a situation of high Demand, causes, (Whodathunk?) High Prices....

    Agreed but also the monopoly of Fletchers on building supplies doesn't help.

    That's not monopoly - that's protection money

    Sooner or later the RBNZ will have to let market forces go gradually back to play ... blunt tools like LVR or DTI ratio are just that - Blunt and temporary
    Chemo never cures Cancer and has to be stopped at some stage or it will kill the Patient

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    Just a note but chemo has cured millions of people with cancer.

    sorry, that is a great myth ( Chemo and cancer is a short lived love affair) chemo is not a cure... I know this one too well!

    Not true, chemo can cure cancer, as much as you can ever say it has been cured. Of course it's usually best used as part of a large toolkit of supplementary treatments. Shame the government is holding one of the RBNZ's hands behind their back on this.

    What damage do you think the LVR rules are having on the market? Stable house prices, rising values of mortgages going to first home buyers, I'd choose this world over the pre-LVR world any day.

    You could say the same thing about the record low interest rates, which were introduced post GFC to artifcically low levels.. At some stage they are going to have to go back up to realistic levels. The fact is that the LVRs are in place, because house prices rises have got out of control,largely because of the record low interest rates, which are a result of the GFC. I would be all for removing the LVRs if the problems are now over, but interest rates should also rise too. They are remaining artificially low because the problems are still there.

    What specifically will force rates to rise to 'realistic' levels?

    NZ has no control over it, as we are just a cork on the ocean.

    DTI's are already in existance! Do we reallty think that if mortgage rates were 15% instead of 5% that banks would still lend the same amount out? Of course they wouldn't! DTI's are as much a function of the cost of debt as they are the income of the applicant. The answer, of course, is to let The Market set the price of Debt, and not an artificial constrainer like the RBNZ/Government. All that follows is financial common sense.

    Sounds like LVRs are overstaying their welcome ..lol

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    Why do these politicians think it is OK to load up the younger generations with obscene debt? Is it because it will keep their older and more numerous voters happy as their house prices continue to rise? Or is it because a significant number of young people are desperate to get into home ownership? I don't know -
    but regardless of this - whoever promises to remove these loses my vote as it will obviously just push up the price of the cheap houses. Bring on the DTI ratios I say!

    Why do these politicians think it is OK to load up the younger generations with obscene debt? Is it because it will keep their older and more numerous voters happy as their house prices continue to rise?

    Yes. It is.

    Also, they're worried they'll lose their jobs if houses start to come down.

    But really, they should have done the job they campaigned for in the first place, then NZ would not be in this position it is.

    Almost 100% of young couples want to own a home. Young Kiwi's are leaving NZ in slightly concerning numbers in part because of how hard it is to buy homes. Prices are the underlying fundamental but the RB has layered additional difficulties on top of that. The govt doesnt want and probably cant tolerate, a major decline in house prices. So the best they can hope for now is a moderate correction followed by flat prices and frankly that wont solve FHB problems. So if they can get some sort of correction and constrain house prices from moving up to fast in the future, then they will want to see LVR restrictions removed for FHB and that seems perfectly reasonable and sensible to me.

    You don't need to leave NZ to buy a home, just Auckland. Plenty of cheap houses in Christchurch and other areas

    They are cheap for a reason - less demand. If you want certain opportunities in NZ, then Auckland is the only place to be, which is why people are so passionate on this forum - they want to stay in Auckland but are priced out of the market. Otherwise they'd simply get on with life and move to the Provinces. Mind you, housing would be the only thing more reasonably priced. Food is just as expensive in Taupo as Auckland.

    Actually from what I hear food is more expensive than Auckland in places like Tauranga, however if you compare that to the difference in house prices I would not be complaining about it.

    Actually the growth in Auckland population has partially been a function of Govt policy. I use to head an economic development agency. When we lost firms to Auckland we would investigate why aspects such as the accommodation supplement allowed them to pay their workers the same but reduce transport and other costs. The anomaly was that a $500 rental in Auckland gets a $100 a week more than a $500 rental in provincial New Zealand. However, a $500 rental in provincial New Zealand is somewhere you can raise a family.

    The principal beneficiaries of reduced LVRs for FHBs will be vendors who will then be able to receive higher bids from FHB using greater multiples of leverage. The single biggest benefit to FHBs would be a fall in house prices. This correction has barely started, it should be left to run its course. By every metric houses continue to be grossly overvalued. There is no justification for demand support at this level.

    This is a purely political decision by govt who clearly cannot bear the thought of a material price correction. They sucked up the kudos when prices were going up, and they don't want them to go down.

    You are looking at LVR restriction on FHBs today. But actually their largest in impact was when prices were much lower. The main effect on FHB was to shut them out in 2013 and 2014, and they fought their way back, basically it stalled them out and led to them buying high. If they had exempted FHB the main difference would have been FHB activity in 2013 and 2014 would have been about 15% higher, that is to say a lot FHB missed out on a 45% run in prices. Id hate to see them miss the dipp again just because of LVR restrictions.

    DTI is almost being applied by the Banks now - although with varied ratios and case by case ... Not sure it would benefit FHB or young buyers as their income is relatively lower ... further restrictions on what we have will kill the market - and seems to be rejected even by the main parties

    LVRs are making FHB save for longer, while prices are falling, meaning that over time they will need to save a lot less. And we are in a global environment of rising interest rates, for the first time in 35 years so DTI's are needed.

    It doesnt matter what the Reserve Bank does, commercial banks get their money on the international market, and the cost of borrowing is going up. It will be the banks that put mortgage rates up, not the Reserve Bank. And its already happening.
    http://www.stuff.co.nz/business/industries/88784545/mortgage-interest-ra...

    and who believes economists,. Simians with dart boards have a better forecasting rate than just about anybody....

    @ K.W. It absolutely does matter what the RB does. If they cut rates the variable rate will drop, the 1 year will drop a ton, the 2 year a lot, the 3 year a bit, the 4 year slightly and the 5 year will still nudge lower. Never the less to make the claim that the long term global interest rate trend (down) has reversed is frankly bold to say the least. With the world saturated in debt how do you propose the globe can move rates upwards long term?

    It obviously isn't affecting them too badly though, because they are still dropping term deposit rates.

    @ K.W. What? Where do you come up with claims like that? Interest rates were rising just back in 2006 but it didnt change the fact that we have been trending towards 0 for 40 years. Rates go up and down but ever lower. The world is drowning in debt so it seems a bit wishful to expect long term rising interest rates.

    Well said LVR's and DTI are there for a purpose and that is to try and make sure reasonable people do not get themselves into a dangerous financial position. The Bank have always used these tools on the average property buyer. BUT they saw a way of strong lending growth in lending to investors who had strong equity. BUT when things got to the point who did they tighten up the credit on. Not your Speculator but the average Jo Bloggs.

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    I think it would show a remarkable (but perhaps consistent) lack of strategic thinking to reduce LVR's now. This would be a move to help real estate agents rather the FHB's. Given prices are likely to drop further FHB's equity is likely to be lost. It would be a continuation of a wealth transfer from FHB to the current generation of speculators.

    @ ex socialist Its not really the govts job to tell people what to do. They should curb house price rises but LVR restrictions make life for FHB extremely difficult. Many of them dont care what you think will happen to home prices, they frankly dont care about home prices at all, they just want to own a home and build a life.

    On the contrary - LVRs do not seem to be discouraging first home buyers going by the amount of mortgage borrowing they are doing

    http://www.interest.co.nz/property/88983/new-reserve-bank-figures-show-a...

    To suggest that FHBers don't care about house prices when they are looking to buy is crazy. Affordability is a huge issue for them and reducing house prices is the best way to improve the issue.

    @mfd Not at all on the contrary you are just lazy at research. in 2013 with LVRs looming FHB rushed in and then fell off a cliff after. Pre LVR they were about 20% of the market and after they were 17%. Over time that normalized which only means that FHB were locked out of the more affordable housing and investors bought it all. Later, after they begged mum and dad, they could buy at the higher prices. The LVR restrictions were a disaster for FHB with many missing out on a 45% gain.
    https://www.qv.co.nz/property-insights-blog/could-2016-be-the-year-for-f...

    I can assure you that my statement does not mean that price is not important, i literally say they should curb prices, but what most are missing here is that most FHB want a home, they wanted a home in 2013, they want one now and LVR restrictions unfairly target them. They missed out on much more affordable homes because of the LVR rules but you dont seem to care that they got screwed.

    You're aware of the existing Welcome Home Loan exemption? Buyers with a household income of less than 130k can still borrow 90%, would you really want to expose FHBs to the risks of a <10% deposit? Or are you discussing FHBs earning more than that who are simultaneously unable to to raise a 20% deposit over the 4 years in question? Perhaps they have issues other than the RBNZ.

    I find it hard to imagine that no LVR restrictions for the last 4 years would not be associated with higher house prices today, and I consider house prices the most fundamental obstacle in the way of a FHB. The RBNZ has limited options to curb house prices and the Government has failed to step up and help, so it has used whatever was to hand.

    You can exempt FHB from LVR restrictions, you dont need to throw the baby out with the bath water. The WHL has a regional price cap that renders it unusable for most and has huge fees that gouge your deposit. The proof is in the pudding my friend, FHB were locked out of a 45% gain and thats a bloody shame, it was perfectly foreseeable, was warned about extensively and could have been easily avoided. I am hoping that we do not see a repeat of it during this correction and opportunity.

    I'm going to go ahead and guess you aren't a first home buyer. I am, and would much rather have a higher %LVR and lower price, than a lower % LVR and higher price. Also they're there for a reason, because with such lofty prices, and high valuations by all measures, any drops could cause those with high LVRs to get in to trouble (and therefore the banks). I wouldn't think it's a good idea to increase risk when the market has stalled and could potentially fall. I imagine the RBNZ feels the same way.

    @tgcam4 FHB got locked out of a 45% gain. They should not have been targeted. Consider LVR restrictions been made harsher for most but exempting FHB's. Now with prices dropping many FHB's will miss out unless the LVR is removed for them. What dont you get about this? I even literally said "They should curb house price rises".
    As to risk, the idea is that the RB puts the brakes on in rising markets and then pushed on the accelerator in declining markets. That is how you get some level of stability. Stepping on the brakes during a downturn is how you get 1929.

    Gotcha, my concern is that there are enough fhb to induce more irrationality to the market if they are offered high lvrs. Maybe there isn't a high enough number of fhb to have an effect on prices- I admit I don't know. If it wasn't enough to raise prices, then the concern would be fhbs all buying in while investors sell out and getting burnt by a falling market with not much equity... Maybe I'm being too nanny state, if you buy in at these valuations its your own risk to discover.

    Well fingers crossed that prices drop a bit more and then hopefully the LVR restrictions get taken off for FHB (they are about 20% of the market in normal times) so they wont by themselves cause the market to explode upwards.

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    Two potential future PMs than are clueless as to why the LVR is there. It's only a percentage and for FHB a lower than 20% is already allowed. The real reason for problems now is both the extremely high prices and the bank credit tightening of which the LVR is responsible for neither of them.

    From now on we're going to see a lot of populist idiotic gibberish from the red and blue parties.

    Last time I looked, NZ household debt was up to 94% of GDP. The market is stupid. DTI limits are a really good idea, just not implemented soon enough.

    @mogador and what would these DTI's look like? How much study have you done on this and do you have a website, what are the downsides, whats your impact analysis look like?

    I'm not claiming to have better DTI answers than RBNZ. They just have to ask the questions (at last they are) and be allowed to answer them (currently under debate). I might be skeptical of their residual market fundamentalism. No, I don't have a website but bis.org, worldbank.org and profstevekeen.com all do. Steve Keen's latest book outlines the problems of private sector debt and nominates NZ as one of many debt zombie nations. He's been repeating himself on this since before GFC 1.0 but the repetition hasn't quite worked yet.

    PS the 94% figure is from bis.org. In 1990, household debt was around 30% of GDP. That's how long TPTB have been asleep at the wheel and it has made the debt bubble a pretty solid contributor to housing inflation of 400% over that time.

    To my understanding Steve Keen says private debt should be constrained, not that DTI's are the answer for NZ.
    He says he clarifies this in his book, but one major question is that that if affordability is filtered through interest rates, then what fundamentally creates the private debt limit that he claims causes the crises.
    DTI's are crude, dont make sense in relation to interest rates and would require a ban on foreign buying.
    Steve Keen i follow closely and respect but it doesnt make dti's the answer unless the major global economies do it first.
    Its not that they are asleep at the wheel by the way, they genuinely believe private debt doesn't matter and it has not yet been proven untrue.

    Steve Keen's basic thesis is that private debt does matter. I guess it's a disagreement between him plus a few others versus the rest. I'm not an economist so I'm not going to convince anyone if Steve doesn't.

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    Dear Jacinda, FHBs do not want a reduction in LVRs, they want a reduction in prices. We don't want both main parties to tow the same line to protect one generation over another. We (the younger generations) had hope you would be the one to listen to us but it looks like you are the same as the rest of them.

    I know an absolute ton of would be FHB that want to see the LVR eased for them. You dont talk for all FHB.

    Now ask them if they'd prefer a world where the house they want were 20% cheaper, or one where they could borrow the extra to be able to purchase at current prices.

    When the LVR restrictions were put in place houses were 31% cheaper. So a lot of FHB indeed got screwed pretty hard on that. More importantly though its not our job to tell FHB what to do, but it is or job to make sure they arnt getting unfairly targeted by policies.

    And now the REAs are complaining that the ramped up LVRs have slowed the market allowing prices to stabilise. Perhaps the RBNZ should have gone harder 3 years ago? Certainly taking their foot off the pedal now would be counterproductive.

    Who cares about REA's? Lots of people complain about LVR restrictions because as we pointed out in 2013 it handed all the gains to investors and shut FHB out of a market they could have done well in. LVR restrictions may stop many from taking full advantage of the dipp as well. FHB should be exempted. This policy of locking them out cost many many FHB's a 45% gain and could cost them yet another opportunity now.

    The more recent LVR restrictions have specifically targeted investors and successfully reduced their role in the market. Would you agree that the 40% LVR rate for investors should be kept as is? What would be an acceptable LVR limit for FHBs? Should they be allowed 90% mortgages, 95%, 100%?

    FHB can be exempted and simply left to bank discretion. LVR for investors at 40% seems to be working so im happy with that.

    You are right that house prices are unfair. This needs to be addressed rather than encouraging high-risk lending.

    DTIs won't be implemented as they don't work as they don't tell the true storey as to ones ability to service debt.
    NZ needs property investors to provide shelter to people who don't want to own or can't afford to.

    NZ needs cheaper shelter so that anyone who wants to buy a house can afford to. High prices mean high rents which make it harder to save which means longer renting and therefore more rentals needed. This is the cycle that needs breaking.

    That is the intent of policy. Perhaps tax benefits should be restricted to new builds so investors are actually adding to stock levels. Lots of Akl investors in new builds around Hamilton as an example.

    House prices coming down is a good thing for FHBs. Those who haven't entered the market due to needing a higher deposit will thank the RBG for saving them thousands on the purchase price.

    @Kate What if they had been able to buy in 2013? Thats 4 years of household formation lost. What if the restrictions dont ease and they miss the dipp. I think a lot of FHB have been screwed. Many couldn't give a toss about house prices and really just wanted to own a home.
    If FHB had been exempted in 2013 they could have bought a median Auckland home for $570,000 that today would cost them $830,000. They would have had 4 years of mort payments behind them and may well have already had some children. No, many would be FHB will never forgive the RB for delaying their lives 4 years.

    So we are playing the what if game now? What if a FHB could buy with 10% deposit and house prices fall 20%? What if they sign up for a huge 30-year mortgage and something happens in that time (redundancy, children, health, interest rates)?

    If they buy for 10%, then prices fall 20% then dont sell. If they must sell because they didnt have insurance for some reason then thats sad but thats also reality, carry income protection. Almost all of the time they would buy for 10% and then move on to live happy lives in a home they can call their own.

    I suggest you do some research on outcome based on LVR borrowing. This is a good start:
    http://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Policy-de...

    That document is about servicing restrictions not loan to value ratio limits. Perhaps you mean to post a different link?
    Here is actual data on LVR's.
    https://www.qv.co.nz/property-insights-blog/could-2016-be-the-year-for-f...
    As you can see it devastated FHB in 2013 and 2014. Effectively it stalled the FHB market and they ended up buying later at higher prices, yay... Its what we said would happen, its actually happened, and it didnt have to happen.

    You clearly did not read the section on high-risk defaults as related to LVRs and DTIs

    What if we put measures in to discourage speculative investment in property and reconnect houses to local incomes?

    Then FHBs would be much better off than if they were to simply say "don't give a toss about the price, just buy from us!"

    Interest rates mean that direct connection to incomes makes very little sense.

    Both govt and the REAs only care about FHBs now that prices are falling. They are now looking around for fresh meat to feed into the Ponzi scheme. "Hey, why don't we let those nice 30 year olds who just got married take on even more grotesque amounts of debt, if that's what it takes to keep me in a job and you in power?"

    Sorry, but that is utterly cynical and disgraceful.

    Im not sure about REA and Govt but lots of us were screaming to exempt FHB in 2013 and it would be a bloody shame if they got locked out of this correction.

    Prime Minister Bill English and Labour Party leader Jacinda Ardern maintained they would respect the Bank’s independence. But both on Tuesday morning hinted at dissatisfaction over how LVRs were impacting first home buyers.

    I understood LVRs are part of the RBNZ's alternate macroprudential tool kit to underpin bank financial stability, given interest rates at record lows fueled excessive, potentially destabilising asset price growth.

    Surely, neither the right or left wish to undermine this regulatory balancing act?

    They want the balance but they are unhappy the FHB are getting the worst of it and LVR is a pretty crude tool.

    I am sure they don't need the double jeopardy of over-leveraging to let the under capitalised out in a stalled market. Nothing worse than negative equity for FHB.

    Negative equity isnt a big factor at all, what do you mean nothing worse? Negative equity doesnt change anything about your day to day life unlike say. Infertility, illness, heartbreak, death, assault and the list goes on. Negative equity is almost irrelevant. But more to the point is LVR restrictions shut FHB out of a 45% gain and could shut many out of buying the dipp.

    Negative equity isnt a big factor at all, what do you mean nothing worse

    Bank comes knocking on the door asking for an equity top up.

    Banks dont come knocking, they dont call, nothing happens.

    Absolutely correct. Unless there is a written requirement for a certain amount of security coverage the Bank is only interested in the mortgagor maintaining agreed payments. Don't forget that NZ mortgages are all obligations mortgages i.e. remaining debt doesn't die with the sale of the property so banks don't need to have the same actions as their US counterparts.

    Isn't the residential property the security and if it's value drops below the bank's declared asset value, namely the mortgage, how are the books balanced to the RBNZ's satisfaction, if a write down is necessary?

    What happened here, albeit on a grander scale of catastrophe.

    Banks run two balance sheets:

    First the despot and loan book
    Secondly the capital book (capital adequacy)

    The value of a house isnt on either. Banks lose money when a loan turns bad and they fail to recover it, that loss is paid from capital, so the books are connected in that sense.

    The security also is not mark to market, and so the drop in value is not recorded unless a change is made to the contract that requires a valuation check. Even then it simply means you cant borrow more, they cant force you to post capital.

    They can call in that mortgage and sell the property under you though.

    First the despot and loan book

    Oh, a Freudian Slip!

    rofl nice pick up :-)

    Banks lose money when a loan turns bad and they fail to recover it, that loss is paid from capital

    Don't the four Aussie pillar banks set aside ~$2.70 against every one hundred dollars of mortgage credit issued - and you claim nobody monitors the collateral value until the loan turns bad? What does 'bad' mean exactly for the mortgagor?

    A loan is 'good' while arrangements are met. However, with any pool of loans there will be an expected loss and general provisions are made for that loss. Banks do not mark security to market, however they do look at loss given default. If the banks expected bad loans to make more losses, say through lower security values then they would make bigger general provisions, they would not run out to high LVR customers and ask them to top up the security or pay down the loans. BTW Banks make unsecured loans as well.

    BTW Banks make unsecured loans as well.

    Yes, credit card debt in the high teens usury band and possibly business debt where the RWA cover is above 100% and the interest rate @ 11% + - but on a diminished basis compared to times past.

    Banks do not mark security to market, however they do look at loss given default.

    Why take security collateral if it's value doesn't demand the attention of the credit fabricator?

    I worked my whole professional career buying bond assets financed by RP (short term financing). There was an initial borrower credit related loan haircut (ie 105% collateral value to 100% loan value, say) and ongoing daily mark to market collateral calls if it's value fell and the opposite if it rose.

    Mark to market is generally used where the underlying asset is the main source of repayment e.g. margined shares, gold or in your case bond-backed short term loans. No assessment is made of other income to repay the loan. The margin required is a function of market volatility and liquidity, set so the lender is unlikely to make a loss. A bank writing a mortgage is primarily relying on the borrowers income to repay the loan, and the secondary source of repayment is sale of the collateral. Banks monitor how much they lose in mortgagee sales to assess the likely loss given default. What people seem to be forgetting in their crash predictions is that borrowers' incomes and loan expenses are not impacted by a fall in housing demand so loan quality is unlikely to be impacted. If prices go down it will be a confidence issue, not a repayment issue.

    What people seem to be forgetting in their crash predictions is that borrowers' incomes and loan expenses are not impacted by a fall in housing demand.

    Depends if general depression is the cause.

    The bonds I dealt have the full faith and credit of the US taxpayer and generally paid an annual coupon greater than the short term funding rate (government guaranteed with a positive carry return - hard to beat) - default was never a stipulated issue. It was my institution's credit rating that determined the haircut - which in realty was in the TBTF category in 2007/8, by which time I had been long retired for 10 years. How many homeowners can claim the same? It will inevitably be a liquidity issue which transforms into an insolvency event.

    Mark to market is generally used where the underlying asset is the main source of repayment

    I guess that must include buy to let.

    One day that may be true but its easy to be early by decades, and frankly at that point its indistinguishable from been wrong. No one has been able to prove what, if any, level of private debt is literally impossible to sustain.

    Without a doubt there will be recessions in the future and some home owners will lose their incomes and possibly have to sell up, however it would take a Depression sized event to impact on material numbers of incomes and therefore portfolio quality. The Banks stress test their portfolios for such events in any case.

    The Banks stress test their portfolios for such events in any case.

    Really?

    RWA adjusted capital of ~$2.70 for every $100 of mortgage credit creation is lacking risk stress planning in the extreme, and I don't care how many mortgagors owes less than 90% on their original current liability ledger.

    Banks know about Govt bail outs, sad but true.

    Depends if that particular mortgage is bundled and sold on. I suspect a single mortgage won't cause a problem, but if pre-set maximums are breached the buyer of that security might be able to send it back.

    You may be confused with the US system where the market is dominated by loan originators but the loans are then on-sold and sometimes bundled as mortgage backed securities. Regardless in NZ borrowers of Term Loan Facilities cant not be made to post capital under any circumstance other than default.

    He means the NZ covered bond market, where the RBNZ permits banks to securitise up to 10 percent of the mortgage book with pristine mortgages, where less than 50 % is owed, and thus segregated from depositors OBR exposure risk.

    Thanks for that note.

    If a mortgage goes bad in the covered bond pool the bank removes it and places a mortgage in good standing back in the pool. There's only about 11% of the mortgages in the bond pool so it's probably fine unless our whole economy collapses.

    There is a simple solution to this but even Jacinda wont speak it - put policies in place that lower house prices. If you are concerned about FHBs and their future, you would support this.

    What is that simple solution?

    reduce house prices

    How would she do that?

    Release vast quantities of land to developers and setup funding for infrastructure. In short, increase supply.

    Not a snowball's chance of that working. There was a very good article linked here a few months back explaining why developers don't supply stock to the market that risks oversupply and falling prices. Land and infrastructure is useless unless someone wants to build on it.

    1. There is insufficient detail stated to make such any accurate judgement, therefore you are jumping to conclusions without facts.

    2. The hidden assumption to the idea that "developers will simply buy all the land" is they possess the capacity to do so. You can corner a limited market but you can't corner an open market. By using the word "vast" I meant to portray that the idea that the amount of land released must exceed the developers ability to simply buy it up. These things are spirals, should land value start to deflate by 10-30% developers who buy and hold at yesterdays prices are taking huge financial risk to the downside. Should significant deflation start I suggest smart developers would dump holdings which were held at inflated prices before the leverage bankrupts them.

    3. Both history and examples elsewhere on the planet where this has worked suggest snowballs must be more effective than you suppose.

    I am not interested in playing by current developer/council rules.

    I like that idea but its got complications like sprawl and infrastructure efficiency.

    There are no simple solutions without complications, on the supply or demand side.

    That is the supply side, how do you reduce the credit on the demand side?

    Ban foreign ownership.

    Love it

    All council land becomes leasehold and for residential use. Teach people how to build there own simple house and allow them to do so. Lol

    Glamping on the Domain. Where do I sign up?

    18 hole golf courses are banned. 9 holes max.

    Takapuna golf course is awful.

    Maungakiekie in mt Roskill is barely used outside of peak.

    Few FHBs in their right mind would borrow 810k for a 900k property in auckland unless they earn "quarter of a million dollars" like REINZ says. Imagine if they bought in march 2017 and another 8% drop in the next few months happens....

    And by the way how many of these couples that earn "quarter of a million dollars" are there? Surely not the policeman, nurses or teachers in auckland...

    The LVRs should stay. To stop the stupid and desperate.

    Its biggest impact was actually in 2013 when it stopped many FHB from making a 45% gain.

    Just had a look at August to date sales volumes, it is an unscientific method and small sample but it looks like August sales volume and price declines will make July figures look good!. I cant believe how fast the market is turning, I wouldn't have expected this until September/October.

    The Real Estate Lobby is winning, aye. Nexus and Vested Interests continue to rule.

    Data shows that the share of houses bought by first home buyers has increased since LVRs were introduced. First home buyers share of Auckland house purchases has increased post LVRs to 22%. This share was as low as 18% pre-LVRs. Source: Corelogic.

    Interesting.

    So perhaps we can conclude from that that it's mainly babyboomers with large loss-making rental portfolios that are doing the arguing about LVRs here - all under the guise of concern for FHBs.

    Completely agree Kate. Buts thas Nats core voting block. Dumping LVR now would underline how Nat is favouring bank profits and the heavily leveraged speculator. A final sell out of the rest of NZ.

    It seems odd to me that the National party is the party of the over-leveraged.

    @ Lemington_05 Link will be required there friend.
    https://www.qv.co.nz/property-insights-blog/could-2016-be-the-year-for-f...
    The data im familiar with showed FHB at about 20% of the market, surging to 22% just before the LVR rules then been savaged to 17%, slowly recovering to 21% as prices peaked out.
    To sum: FHB got locked out of the low prices in 2013 and 2014 and were forced in to buying much later than they wanted, essentially been stalled in to higher prices.

    Auckland is similar: 20% to 24% before restriction then crashing to 19% after and slowly increasing as prices rose. This is exactly what we didnt want. We wanted more FHB in 2013 and 2014, the LVR restrictions caused us to get the exact opposite.

    LVR restrictions were good, but FHB should have been exempted as we said in 2013.

    Why do we want more young people to over-extend themselves into a lifetime of debt?

    Did you somehow reply to wrong post, or not read my post or what? LVR restrictions caused FHB to buy at higher prices, they should have been allowed to buy in 2013 and 2014 when prices were 31% lower. LVR restrictions caused them to pay more, which is my point.

    The Welcome Home Loan scheme has always been a 10% deposit, hasn't it? One of our kids bought their first home a few years back using it. Not sure what you're on about;

    http://www.welcomehomeloan.co.nz/

    Yeah, some AKL house prices were so ridiculous that they didn't qualify - but surely that's a good thing? First homes need to be affordable for FHBs. When you first take on mortgage debt is the most vulnerable/at risk time in any period of family formation. Common sense must prevail.

    The WHL has regional limits that make buying for most n Auckland totally untenable. The steep fees used to cover the insurance charges sitting in behind the WHL gouge the deposits. In short the WHL does not do an adequate job and the proof is in the numbers. FHB got rekt in 2013 and 2014, exactly when they could have been buying *cheap* (in relative terms). They got locked out of a 45% gain and ended up buying later at higher prices.

    as we said in 2013.

    Who are "we"?

    Yes, wondered that myself

    This forum is obsessed with doxing.

    Assorted vested interests want to keep the party going longer, keep the champagne flowing and suck in the late-comers.

    That the party will eventually finish is in no doubt. Only question is how sore the heads will be in the morning.

    Pathetic, self-interested expediency.

    It annoys me when people see the ease of gaining credit as the best way to make housing more affordable. People need lower prices not easier credit.

    While in principle I agree with Bill English's sentiment that there must be a scenario in the future whether LVRs and other temporary measures are not required, I don't think New Zealanders financial decision making will ever be at the point where these backstops are no longer necessary.

    Unless we have a 1987 type event in housing which changes the false assumption that housing never goes down and borrowing excessive amounts is always the smart decision, then people won't learn. It worries me that we had a massive housing bubble overseas in 2007 and New Zealanders tell ourselves we are special and it won't happen here because Auckland is a global city. This crap is why we need LVRs to protect us from ourselves.

    Its harmed FHB hugely. They got stalled out in 2013 and 2014 and missed out on a 45% gain. They were later able to re-enter the market but at way higher prices. They should have been exempted from the start.

    Goodness me. Just make the house prices go up and up and up. Go bananas please.
    http://www.trademe.co.nz/Browse/Listing.aspx?id=1394303409

    Hardly, you say: "It annoys me when people see the ease of gaining credit as the best way to make housing more affordable. People need lower prices not easier credit"

    Less credit = lower house prices

    It's simple as that

    You mistinterpretted my words. I agree, tighter credit = lower house prices = more affordable housing. Therefore the restrictions on credit should stay or get tighter through DTIs.

    Give a man $10,000 and house prices go up $100,000. Take $10,000 from a man and they go down $100,000. We think putting cash in people's pocket makes houses affordable, it doesn't. Any extra cash just unlocks debt many times that amount. As long as the money is broadly available, no purchaser is better off.

    I'm VERY surprised Labour does not support LVR (or DTI). Make no mistake the LVR's are the main reason the housing market has slowed to a halt. I understand Ardern is saying Labour will fix the housing problem by building more... Hmmm, that is easily said but much, much harder to do. You need many more builders and trades people to build more houses, more infrastructure, more capital and it also takes a huge amount of time. Building material costs and hourly wages for builders and tradespeople are escalating (I've been an Architect for 25 years, I have a fairly good idea)

    I'm surprised also but when you consider Ardern and Robertson are opening the door on tax changes that will help alongside a major building programme and some limitations on immigration. I'd like to see a land tax but I doubt they are that brace.

    Labour - trying to be everyones friend with "we'll sort it out in other ways" while taking a dig at the Nats

    National - "We want them to stop now but its not up to us." makes it look like they are doing something

    Both election posturing to the layman but also showing their complete lack of understanding of the market forces at the moment

    Ackland prices need a crash and will inevitably get one - looking at houses priced under 800,000 (fhb target) on the realnz website the houses are total junk, half of them look leaky monolithic claded poop not worth half of what they are asking. honestly FHBs out there you are better off renting until prices find their true value. Even consider renting for life rather than taking on huge debt for low quality crappers. They will just end up a constant headache. Be warned!

    Renting for life was not an option for me. It was only on the radio the other day the shit the current 65 year olds are in as they approach retirement and have nothing to show for it. Imagine what a whole generation of "I couldn't be bothered buying a house, they are too expensive and I cannot do a 25 year mortgage so I blew all my money on just having fun" is going to do for the state of affairs in NZ. Unless your parents are absolutely loaded and even then your shouldn't count on inheriting all the loot, you need to get your own life sorted. Your parents money should be just the icing on the cake, you should lead your life on the assumption your not getting any of it.

    yes Carlos. There is a name for it. Called the retirement " income cliff "

    NZ Herald had a lead item coming out against removing LVR's this morning at 05:00am....article seems to have disappeared...pressure from above perhaps:
    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1190...

    They had another one by Liam Dann titled "First home buyers need LVRs to stay". I read it in the print edition of yesterday's Herald, then wanted to find it online. I had to search through three layers, it was buried deep in the property news archive. Maybe their advertisers complained?
    http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=1190...

    Exactly,the advertisers pay good money,the least they can expect is editorial control !!
    Someone must have forgot to pass the article to the R/E agents for final clearance before publishing.

    Free Press is a myth, bromide and a white wash.