sign up log in
Want to go ad-free? Find out how, here.

Start to new lending restrictions delayed by a month, but RBNZ expects banks to observe the 'spirit' of the new rules from now

Start to new lending restrictions delayed by a month, but RBNZ expects banks to observe the 'spirit' of the new rules from now

The Reserve Bank (RBNZ) is pushing ahead with new tighter lending rules for mortgages.

But it has pushed the start date back from October 1 to November 1, citing disruptions from the outbreak of Covid Delta. 

However, it says it expects banks to comply with the "spirit" of the new rules immediately.

That effectively means the rules do apply as of now, though obviously won't apply to existing bank pre-approvals.

The new rules will see banks now restricted to just 10% of the new lending for mortgages that make up over 80% of the value of the property. Previously this so-called 'speed limit' was set at 20%.

The latest tightening joins a series of measures aimed at reining in the runaway housing market. Already this year we saw investors slapped with 40% deposit rules from May, while the Government announced various measures, including the end of tax deductibility on interest for investors back in March.

The RBNZ has been consulting on the proposals and has conceded that the new rules will mainly affect first home buyers.

Reserve Bank Deputy Governor Geoff Bascand said the consultation had been launched earlier this month after the central bank observed that despite previous adjustments to LVR restrictions, house prices "remained unsustainable" and the risks of a housing market correction had continued to rise, increasing risks to economic and financial stability.

"Restricting high risk lending will help prevent these problems getting worse," Bascand said.

This is the statement issued by the RBNZ on Thursday:

The Reserve Bank of New Zealand – Te Pūtea Matua will proceed with its proposal to tighten Loan-to-Value Ratio (LVR) restrictions on lending to owner-occupiers to reduce risky mortgage lending.

From 1 November 2021, we will be restricting the amount of lending banks can do above an LVR of 80 percent to 10 percent of all new loans to owner-occupiers, down from 20 percent at present, Deputy Governor and General Manager for Financial Stability Geoff Bascand says.

“We launched our consultation earlier this month after observing that despite previous adjustments to LVR restrictions, house prices remained unsustainable and the risks of a housing market correction had continued to rise, increasing risks to economic and financial stability. Restricting high risk lending will help prevent these problems getting worse.”

Submissions from industry representatives were largely supportive of the proposal, with respondents recognising the need for further tightening in order to help control house price inflation and mitigate potential risks to financial stability. Feedback from members of the public was mixed, with some submissions supporting the proposals, and others questioning the need for further restrictions or arguing for other policies to protect the financial system. We’d like to thank everyone who shared their feedback during the consultation process. We have published a summary of submissions received alongside a regulatory impact statement.

Our consultation proposed implementing the new LVR settings from 1 October. However, given the disruptions from heightened COVID-19 alert levels to customers and banks in managing or completing purchases associated with existing pre-approvals, we are delaying our implementation start date to 1 November. We expect banks to comply with the spirit of the new restrictions immediately.

The proposed policy change will take effect by altering banks’ Conditions of Registration (CoR). A short consultation on the required changes to banks’ CoR will be launched today.

We welcome your comments below. If you are not already registered, please register to 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.

69 Comments

Too Little Too Late

Up
26

Could be Labour’s slogan for the next election

Up
22

Yes, the real levers, interest rates and DTIs, havent been pulled yet.

 

Up
5

Interest rates don't slow credit creation 

Up
2

I note the RBNZ in their summary of submissions have decided not to pro-actively engage with the Pasifika community on this occasion, as they did when they eased LVR restrictions last March. How curious.

Up
13

LOL, how curious.

The RBNZ management are just a bunch of hypocritical clowns, trying hard to hide their ineptitude behind a thin veil of political correctness.

Up
7

We launched our consultation earlier this month after observing that despite previous adjustments to LVR restrictions, house prices remained unsustainable...

Ain't going to work boys, you'll need an elephant gun to stop this bull market. Your threat of a 25bps pea shooter frightens nobody.

Labour and energy will take CPI way further and faster now.

Up
13

But if shooting it once doesn't stop it they'll keep shooting.

I don't know a lot about hunting elephants but i would assume if you shoot one with a small caliber gun enough times it'll eventually die.

 

Up
1

Unless it tramples you first

Up
8

I don't know a lot about hunting elephants either, but I would assume if it was on a rage running towards a crowd of people, they'd shoot to kill - not to just make it more angry.

Up
1

I don't know a lot about hunting elephants either, but I would assume if it was on a rage running towards a crowd of people, they'd shoot to kill...

Luckily elephants are miserable shots.

Up
8

What's the use of worrying about the 'elephant in the room' when 'the barn door has been shut only after the horse has bolted'.

Up
0

...just keep feeding it until it explodes.

Up
5

Much of the reason for this will be to help limit OCR increases. 

Despite what all the bank economists say, I would be surprised if the OCR is higher than 1% this time next year.

Up
10

LVR restriction has nothing to do with OCR decisions. OCR going up or down is not determined by how hot property market is but is determined by how economy performs. 

Up
2

Property is around 15% of GDP so does massively impact on economic activity here in NZ.

Up
3

LVR restriction has nothing to do with OCR decisions. OCR going up or down is not determined by how hot property market is but is determined by how economy performs. 

I think you're missing the point. Just because the RBNZ says house price activity has nothing to do with their mandate, it doesn't mean anything. Yes house prices are not their mandate. Are they feeling pressure to look like they're preventing the bubble from getting out of control? Yes they are. If their actions like LVR protects their perception, they're more comfortable. Furthermore, they know without a doubt that the bubble is related to their meddling with the cost of credit. Blind Freddy knows too. Don't be fooled by the bureaucrats. 

Up
8

There are reasons that RBNZ saying that house price activity has nothing to do with their mandate. That's because how OCR is designed as a tool to support economy. Whether they are complete following that mandate would be another story due to housing bubble. Yes they can twist the rules a bit but I don't think they can completely ignore the fact how OCR was designed in the first place and use it for different purpose. Plus, there are other factors that effect OCR decision like global monetary arrangement and borrowing cost. 

Up
0

Sorry but this is so contradictory because if house prices fall the economy is going to perform terribly and the RBNZ know that.

So its really about how the economy is performing AND making sure that house prices don't fall - because if they do fall, we all know that the economy will collapse.

Up
4

Yes, house prices falling might risk economy collapse, however, ignoring inflation and over heated economy by not raising OCR quickly enough will bring higher risk to collapse economy, if that happens, housing price would fall anyway.

Up
0

Funny how there were minimal signs of deflation last year and we had emergency OCR cuts.

This year we have actual recorded signs of actual high inflation, but no action on OCR and if we do it will be a slow and measured response.

Do you really think the RBNZ are focused on CPI?

I don't, I think they're focused on ensuring asset prices don't fall.

Want to understand a person or groups intentions? Don't listen to what they say, look at what they do.

Up
13

It's always harder to hike OCR than to cut, especially with assets bubble in place. They are probably thinking the inflation is still within tolerance, not as risky to bring down the economy as current housing market is.

Up
0

The Dual mandate of CPI and Full employment does point to ongoing lower Cash rates.  If we get higher CPI but lower employment that can say they are meeting their Employment obligations.  These Manufactured global Interest rates have inflated assets prices for years.  My Bush Economics view on Interest rates is they should be approximately the CPI rate, plus a margin to provide some return after actual inflation.  Maybe I am old fashioned in my view that if I let the banks use my money that I should get something for that.

Up
0

For non asset owners the economy is already performing terribly. 

 

 

Up
13

I'm not sure I can't think of a point in history in NZ when there has been such a fundamental issue present in society that we like to pretend that it doesn't really exist.

That is that our housing is exceptionally overpriced and over protected as an asset class - and that having such high house prices is the cause of social and financial instability, yet there is zero political ambition to do anything about it.

The elephant in the room is there for everyone to see - yet those with chairs (generally older people) are sitting back in their recliners telling the young people getting trampled by the elephant to keep quiet because 'I'm feeling rich'. What a %#@% up society we have.....

The sooner this is resolved, the sooner we can move forward in a sustainable and cooperative manner. Until then, the elephant isn't going away, its going to continue causing havoc and discomfort, despite those who are in positions to do something about it want to pretend it isn't even there. You can't, its there and its going to continue to be damaging until we actually acknowledge the problem and take steps to correct it.

Up
29

Well, it's coming back to bite us now. If housing was affordable people in South Auckland wouldn't be living 12 per property and Covid would be far more easily controlled.

Up
9

COVID has been a blessing for Adern as it means no pressure on this issue which they have abandoned...

Up
12

An outstanding summary of the situation...

 

Up
6

Exactly. And how's the team of 5 million responding to this for the greater good?

 

Up
2

I guess this makes them look like they're doing something 🤔 Pitty it will actually achieve nothing apart from further disadvantaging FHBs who don't have family assistance for a deposit...

Up
2

I know median house price is a flawed measure, but it's the main measure used in the mainstream.

This, along with some other factors, will push the median house price up significantly. 

The HPI less so.

Up
0

How??? 

Actually it does the opposite with existing house stock- it may do this for new housing - where the LVR's are not as strict.

How it should work is as follows Take FHB - he wants to buy an $800K house - at the moment he has $100K deposit - he can borrow $700K and he's in his first house.

With the new LVR - he will need $160K deposit - so he now has to keep renting until he saves another 60K. 

For house upgrader person who was selling the 800K house (that FHB wanted) - and only owed $300K on their house - they were going to use the $500K gain plus their 700K they can borrow to buy a $1.2M house

Now house upgrader has fewer people who want their house (ie demand has fallen) - as FHB is no longer in the market ,the investor has also left the market (due to tax changes). They now need in order to sell their house to drop their price to $750K - this means they now only have $450K gain - they can still borrow $700K - so can now only pay $1.15M for their next house.

Now if house upgrader still wants to sell to FHB (as he's the only one in the market) - they will need to drop their price to $500K so that FHB has enough deposit to buy the house.  This would then mean the house upgrader only has $200K capital gain and can only buy a house for $900K.

Overall it results in a drop in house prices.

BTW this is the exact scenario that occurred when LVR's were introduced in 2013-2016 and in Australia in 2017-2018. It stabilised houses - in Australia it dropped them by 10%.

The only time this would not occur is as already stated in the new house market or where there were lots of FHB's / investors that meet the LVR requirements - and they outstrip the number of available houses ie demand exceeds supply.

 

 

Up
3

The whole market compositions shifts upwards. There won't be anywhere near as much activity in the current price range of 700-800k in Auckland.

It's basic math that this means, all things being equal, the median will increase.

Up
0

The only way that works - is if people who already own houses only sold their houses to each other. For those entry level houses- most people in them now wont wear the costs of changing houses (approximately 50K) to buy an identical house. 

The house market works by everybody upgrading - the FHB's - buy the entry level house - then in 5-10 years time upgrade to their next house and so on. If there are no FHB's then the whole scheme falls apart really quickly. Hence why some people in NZ refer to the housing market as a ponzi scheme. You need the bottom of the pyramid to appear to make those at the top of the pyramid rich. Remove the bottom and the pack of cards falls.

Up
4

More like $100k to trade like for like at the moment.  That's a lot of cash to burn before you even pass go, let alone upgrade to a superior property. 

This little hurdle seem ignored by many, however must be playing a significant role in slowing the market - it is for me anyway.

Up
3

Note, this is 'all things being equal'.

This effect will be counterbalanced by other factors.

For example, all the new townhouses coming online - prices may need to be discounted, given first home buyer demand will drop off the cliff.

Up
0

Thats not correct- hence my first commentthatthe "new house " market may continue to boom. Buyers of off the plans will still only require 10% LVR's. This combined with the brightline test and tax advantages for new - for investors- will mean more competition for off the plan houses.  FHB person I mentioned before could get into the market still with his $100K buying new - and technically could pay $ 1 million (assuming he can borrow 900K). He however will need to compete with mum and dad investor who with their equity can afford $1.1M for the said townhouse.

However this doesnt create any benefit for house upgrader person - who still has no demand for their existing house- and if anything is now facing lower demand in a market where there is more supply (through the inclusion of the new townhouses). House upgrader would once again need to lower his house price to a level where the FHB can afford to buy it on a 20% deposit. 

Up
0

I would have thought lower LVRs for new builds  would be hit as well as part of the decrease from 20% to 10%.

Surely they would be.

Regardless, there's lots of other reasons why that part of the market will drop away. The most obvious one being that developers can't any longer deliver 2 bedrooms townhouses in the Auckland market for less than the Homestart price cap of 700k. Because of land and construction cost escalation.

A large number of FHB purchases over the last 3 years have been care of the Homestart program.

Up
0

The phrase is "all other things being equal" (ceteris paribus).

"All things being equal" makes as much sense as top down stimulus.

Up
1

Sorry correction. I thought you were talking about median multiple, not median house price.

The median multiple is the best measure we have to show whether we have a dysfunctional system or not (we do) and if there is any criticism of it is that it underestimates the dysfunctionality.

And it is used by international organizations so is more than just MSM mainstream.

Up
0

When I moved to NZ in 2006, one of the things I remember (this is not a critisism but merely an observation), there was a level of conversation at social events that was dominated by property. I was renting at the time and had no issue mentioning that. There was/is a definite stigma in the air around renting as couples sheepishly admitted to "only renting".  In my opinion, renting or owning is down to a myriad of different reasons and should not be a class system. 

Back to the article, the RBNZ (even though technically its not their mandate...blah blah blah) and the government should be working harder and faster so MOST citizens can afford their own home. People should still need to save deposits and the first few years of owning will always be tougher than when renting. What we are asking the young to do to get on the property ladder through FOMO and greed is ridiculous. It's a problem and we have the tools to solve it. Such a shame that politics is a popularity contest and not truelly whats best for the citizens.

Up
7

This is a genuine question -I'm curious to know with interest rates also rising (most banks have increased all fixed rates by .5% since July 1st) and with 70% of current mortgages on a 12 month fixed rate, interest rates rising will mean people will have shortly higher repayments - what are people intending to cut back on to service their higher repayments.

On a $500K mortgage a .5% increase in interest rates equates to $2500 more in interest per annum or roughly $200 a month in repayments.

For a $1 Million mortgage it equates to $5000 more in interest or $400 a month.

Do people have disposable cash available- ie savings, or are you planning to cut back on eating out or holidays.

 

 

 

Up
1

Reduced spending on goods and services, which will limit real economic growth, which makes it even harder to service all the mortgage debt we have created (and government debt via higher taxation).

Up
2

But what goods and services will you cut back on - is it dining out (ie hurting hospitality) or would it be clothes and books ie whilst this doesnt affect me in my scenrio - I have about  $1000 in disposable cash a month- this is for fuel, eating out, clothes, christmas presents etc.

If i had to find another $200 a month - I would only eat out every second week, spend less on christmas and maybe delay minor house maintenance things.

 

Up
0

As economic theory goes, luxury goods are the first to go when income is stretched as you have to buy neccesity goods.

Up
0

As economic theory goes, luxury goods are the first to go when income is stretched as you have to buy neccesity goods.

Kind of correct. Actually luxury brands have been booming in Australia in the past 12-24 months. 

A more accurate description would be 'nice to have' goods. NZ supermarkets are full of them. You know, those niche, craft-type products that are high quality but also you pay a premium to enjoy them. 

Up
1

You could also keep spending at the same level and cut back on savings.

Up
0

It's not necessarily anywhere near that bad.

I will be refinancing in November. Even assuming my mortgage rate increases by 0.5%, I will only be paying about $30 extra per month.

Because I would have paid off about 20k of the principal in the previous year.

Up
0

How big is your mortgage?

Up
0

Once again smashing FHBs while using the kid gloves on investors. Expect the effect to be to locking the young and lower income people out of housing yet again, meanwhile investors continue the perpetuating cycle of rising capital gains providing equity to finance further purchases at insane prices which in turn increase capital gains and so on.

Up
6

We'll have to wait for the DTI restrictions for anything that will seriously derail the capital gain -> equity -> more properties merry-go-round. That's the thing that actually means more equity is not enough to take on more debt. 

Hope the RBNZ doesn't forget about it...

Up
9

David Hargreaves all that RBNZ is doing seems to be good but reality is that it need to go hard and fast to control the ever growing house price but as has no real intent are tweaking as have to under pressure.

Any news on DTI as they have been after that tool since number of years so definitely must have done their home work before asking it in their tool box or maybe they were asking because they were confident that politicians will not give go ahead but now that they have are on backfoot and silent, hoping that God will help them with another event / disaster or .......to find excuse to not use.

 

Up
4

on DTI - see my comment at the bottom - they will "suggest" on 1 Nov and likely implement on 1 Dec - Merry Christmas home buyers from Santa Clorrs

Up
0

on DTI - see my comment at the bottom - they will "suggest" on 1 Nov and likely implement on 1 Dec - Merry Christmas home buyers from Santa Clorrs

Up
1

Actions speak louder than words. Its pretty clear now that the RBNZ doesn't care less about the property bubble, they have had months to put the brakes on and they are still fiddling around the edges. We may see a small rise in the OCR going into Summer but its all to little to late now anyway. I'm expecting us to get back to the 1% in February but nobody with a house already will give a rats.

Up
5

That's because owners want the price bubble and FHB's want to buy into it. 

FOMO in both cases.

Conditioned fear. 

It's the only way to manipulate the masses!

Up
1

That is actually good news for rents, yields and portfolio renewal!

Astute investors should position themselves for inventory availability coming from FHBs who bought off the plans and are unable to settle at completion date. This will add new inventories into investors' portfolio with a tax shield advantage as they are new builds thus bringing down the overall tax liabilities.

It is also pertinent to re-look at current rental ask price and readjust them for rising demand and inflation.

Up
1

Is that you Ashley Church?

Up
8

You make a good point. A lot of the new housing coming to the market in the next 6 months will need to discounted, so there could be some good buying opportunity.

Up
0

The first two sentences of your comment tell me everything I need to know about what kind of person you are. It's not a pretty picture.

Up
11

Probably not actually that big of a deal for anyone if property prices keep rising so fast. If you put 10% down on a house now you might only need to fix for 6 months as a low equity mortgage before you get a new valuation and end up at 25% equity and the bank can repeat the process with someone else.

Up
2

Good point.

Another reason those refinancing soon may not have much if any increased mortgage outgoings.

Up
0

I reckon this, along with some other things, is going to kill the residential property development sector in 2022. 

Just you wait.

A huge part of construction in the past 3 years in Auckland has been building townhouses for FHBs.

Even without this, that was going to be affected. Developers can't deliver under the Homestart price cap of 700k, in Auckland, any longer.

Add this to the mix and that FHB demand will fall further.

Throw in a whole lot of other things like increased cost of debt (issue for both developers and buyers), less investment from China etc and you are starting to see the perfect storm for the residential development sector in 2022.

 

Up
6

This summer is going to be hot! 5 - 10% hot.

Up
1

yes very hot. In fact property will be so hot it will be barely touchable.  

Up
2

Yes fingers should get burnt, but the reserve bank will protect investors.  Every child needs to learn the hard way that the oven door is hot without a parent protecting very move.

Up
1

The fed took a pasting this morning in the post statement press conference due to governors investing in assets classes the fed policy is driving higher. Now if we had any media in NZ that weren't part of the great and groomed.. the same would be happenning here.

 

Up
1

Side show. The Fed represents the asset owning classes and are all part of that class - and thus all of what they do is to benefit themselves and that asset owning class. 

Worse still, Congress is allowed to insider trade. 

 

 

Up
2

Sorry but the story and headline here are so wrong....if you read the summary of submissions and the last point #46 "We also intend to consult in November on the introduction of debt serviceability restrictions."
Followers of the RBNZ will know they don't consult they implement.  They already have the total picture of the market through their position and the smart people working on things so all they do is come up with the policy, take on board submissions to be viewed as "all inclusive" then implement what they initially "suggested"....as far as the housing market goes it won't be a RBNZ initiative that stops the price growth or turns it around.  It will be an external factor if at all that no one saw coming.

Up
1