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Key says RBNZ move on capital for landlord mortgages logical, given falling inflation means Governor needs tools other than OCR hikes

Key says RBNZ move on capital for landlord mortgages logical, given falling inflation means Governor needs tools other than OCR hikes

By Bernard Hickey

Prime Minister John Key has weighed into the debate over the Reserve Bank's proposal to toughen up capital requirements for rental property mortgages, saying it was a logical move for the Reserve Bank given inflation was falling well below the Reserve Bank's target and therefore the bank needed other tools.

Key also pointedly noted that inflation was below the Reserve Bank Governor Graeme Wheeler's policy targets agreement target of about 2% and may go lower than the current 0.8%, which kept downward pressure on interest rates.

"There might be some logic in that, but we'll have to see," Key said when asked directly about the Reserve Bank's proposal that banks classify rental property loans in a new sub category that would allow the regulator to specify higher capital levels at a later date. See more detail on the proposal here in Gareth Vaughan's article and in David Hargreaves' article.

Asked about rental property investor concerns that higher capital requirements would put up their interest costs and rents, Key said: "That's always the concern. It's one of the reasons I don't like capital gains taxes because in the end the incidence of those capital gains taxes are paid by those people renting properties, but in the end, the Reserve Bank has tried to expand the number of tools in its toolbox to ensure that it can keep interest rates lower for longer."

"Given where inflation is at, they certainly look like staying lower for quite a bit longer," he said.

"Given what it was doing around LVRs, it was trying to ensure that there's not a bubble emerging in the housing market and it can control where it sees the pressure points, and doing so in such a way that it's not having to overly increase interest rates," he said.

"In reality, given you've inflation at 0.8%, and potentially lower when new information comes out, then you've got a scenario where it's not an option for the bank to raise interest rates, so it does have to find other ways, potentially in that very benign inflation environment, to work out how it can control what it sees as pressure in the system."

Key points RBNZ to 2% inflation target

Asked if the Reserve Bank should now be cutting interest rates given inflation was below the bank's 1-3% target band, he said he did not know as it was a matter for Governor Graeme Wheeler.

"But the Act is quite clear. The bank has got to work to have inflation at its mid-point of two per cent, and it's 0.8 per cent (December quarter annual inflation), and all the signs I see is that potentially it goes lower than that," Key said.

"There doesn't appear to be any upward pressure on inflation, and generally if anything it looks like it's downward, and the Act is quite clear about what point they should be shooting for, which is 2 per cent," he said when pressed about whether the bank was undershooting its target.

"The Governor has the flexibility to ride things out a little bit, but overall there's a reason why the target is set at 2%. That's perceived to be the correct level of underlying inflation in New Zealand," he said.

Asked how long the Governor could be outside the band, Key said: "You'd obviously expect to cut them a bit of slack because they make their interest rate predictions and changes for inflation 18 months out. It's bit like turning around an oil tanker. It's not as simple for the Governor, in his defence."

(Updated with more details, quotes)

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25 Comments

This is just plain dumb .  Can someone answer the question below please ?

If you remove investors from the housing market by making interest rastes so expensive they cant afford the investment then WHO  on earth is going to supply rental stock to the market ?

We have 55,000 new migrants needing somewher to live every year

Young people who cant raise 20% deopsit are out of the market , now you want to restrict the supply of houses to rent .

Where are they going to live , in slums ? Are we going to allow informal housing to be erected on vacant domains like in Rio De Janiero or Cape Town ?

Of course it  palys into the hands of those who already own the investment properties , as they cannot be penalised retrospectively .

Its patently obviuos that this has not been thought through at all .

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"If you remove investors from the housing market by making interest rastes so expensive they cant afford the investment then WHO  on earth is going to supply rental stock to the market ?"

 

Follow your question through to a logical conclusion - if interest rates mean someone can't "afford" an investment then the value of the property or the amount leverage is too high! If affording means topping up payments on a severly negatively geared property (Auckland) then the property is reliant on capital gains which is probably the exact type of speculative behaviour the RBNZ would like to reduce.

 

Tens of thousands of rental properties cannot be sold at once (and many owners would not want to/need to sell) - if a property is sold it is either sold to another investor or an owner occupier (renter) - the property doesn't disapear. The exception would be offshore investors who leave properties unoccupied.

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Boatman, if an investor decides to exit the market the house will still be available for use...it won't disappear or fall down a sink hole....if there is a mass exodus of investors, the properties will be sold to owner occupiers or investors and potentially at a lower price.

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There's an over supply of rental investors and speculators who don't work to get houses just ride supply and demand. So re-balance, fewer investors, lower LVR to 15% for first timers, more young buyers. Better communities where you bother getting to know your long term neighbour, stability of kids at schools, street parties. Ex rental investors can try their hand at supporting the markets

Investors have past the point of social usefulness

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First:  FHBs blocked from market, next kiwi investors blocked,  - so more properties for foreign buyers.  So, more kiwi renters to foreign landlords.   Globalisation goal achieved..

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Perverse, but the external $s has no risk to NZ.

 

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That is a very easy problem to solve.  Almost just the stroke of a pen for Key.

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The number of houses remains the same.

The landlords are not by and large building are they? just swapping houese with one another.

 

 

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yes, same as many consents.  it's for patch up work and changes in regulation that require the consent. as the musical chairs occurs; people have to tidy their patch, make things their own. 
similar problem with brownsite development - knock down one house, maybe put up two or flats, but just as often knock down for commercial or other use.  (knockdowns require consents, as do non-res building work)

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You are so heavily invested, both financially and emotionally that you can't see the obvious.

If you reduce demand prices will fall and those locked out of the market (both investors and owner occupiers) will re-enter the market. Although I'm guessing investors will be less interested without the capital gains.

I'm really pleased action is finally being taken against the speculators.

 

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This seems a rather important statement by John Key. In the past I have wondered if there was some kind of unwritten understanding between Key/English on the one hand, and Wheeler on the other, where deflation would be tolerated, and that a high interest rate, high exchange rate outcome was what they really were after. That somehow foreign financiers were pulling the real strings.

Now Key is explicitly saying that the 2% target is the core target, as indeed the Act says it is.

The RBNZ therefore have rather badly missed their target, and Key is making that clear. 

D- from the Boss; lift your game Mr Wheeler seems to be the message. 

Taken at face value it's difficult to see interest rates staying where they are unless these non interest rate tools really start to bite, and in a hurry.

 

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Stephen L, that's right, Key is saying "lower those rates" and if Wheeler does right now he will be pouring more fuel on the property bonfire...strategy is to hammer the investors first and then drop the OCR...nice plan, I like it....however, there is still the capital flight issue from China that is pumping up the Auckland market, and Wheelers plan may not have an impact in that area.

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I understand the dilemma. But Key is saying inflation 2% is the target. Nothing about Auckland Property prices. Not Wheeler's problem, apart from bank solvency, which really is pretty solid.

 

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Yes ok...but what is the key driver behind the perceived bank solvency issue? Auckland property perhaps?

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Yes, he is a possible patsy for the Australian banks. Lower engineered inflation, lower interest rates, weaker domestic currency hence lower local currency cross currency basis swap collateral commitments against foreign wholesale funding . When all said and done many $billions are borrowed offshore and USD interest rates are rising irrespective of the collateral bonanza. A vicious or virtuous circle? Depends who is paying I guess.

 

Every cent Australia’s currency drops is freeing up billions of dollars in funding for the nation’s banks, the biggest such gains in at least five years.

The four biggest lenders borrow abroad to cover the majority of their non-deposit funding needs and declines in the Aussie cut the amount of collateral they need to post on the related cross-currency swaps used to hedge offshore bond issues. The cash that frees up helps reduce their requirement to sell bonds.

“For every one cent decline in the Australian dollar, I estimate Westpac and Commonwealth Bank get a A$1 billion inflow,” Brian Johnson, a Sydney-based analyst at CLSA Ltd. said by phone. “National Australia Bank and ANZ would get half of that.” Read more

 

 

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but how can deflation be tolerated? If they turn us int a second Greece, well i suppose they can buy up NZ cheap. Until NZers take it back off them.

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They also missed rather badly in the last cycle on the other end of the spectrum when inflation got up to 5% - didnt see asset rich borrowers complaining about the high inflation,  and the too slow to hike, that time - always interesting to see who the complainers are.

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You are conveniently forgetting the 2.5% increase in GST in the last cycle.

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Nope - I was fully aware of it and they rightfully said at the time that they would look through it because of it. Suspect you have forgotten that a 50% crash in oil prices is the reason that we've have inflation down here below the RBNZ's band...calculated in Q1 to have taken between 1.0 - 1.2% off the CPI. People so often only remember or acknowledge what suits their argument ?

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Nearly all commodity prices are well down, including dairy prices. The exchange rate is "unjustifiably" high. Global capacity is much higher than demand. Chinese demand is soft. So commodity prices are not racing up any time soon. It is far from clear what Mr Wheeler is waiting for.

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Wheeler is waiting for more zombie regional cities, more foreign owners of more nz property, more youth unemployment, more deflation of nonAuckland houses, more farms sold to foreign owners, more NZD purchasing by global investors, more population growth in Auckland etc.  All worthy goals if you have no particular loyalty to the future social stability and prosperity of NZ. NZ uniquely. 

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"The Act is quite clear -  target is 2%". 

NZ is missing the target -  inflation is dropping from .8% (1.2) below the target. 

The upcoming quarter will be .1%.  That's 1.9 below target. 

Aim for the target.  

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The Act also says he has 18 months to get the inflation rate back on target. This is just Key trying to look like he cares about middle NZ without actually doing anything.

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Wheeler can drop the OCR right now provided he can develop a strong statement that he will hammer with the policy options he is threatening. The overseas based holders will be the first to try to escape if they think the axe is about to fall. The exchange rate will beat a hasty retreat  ahead of all other actions.

That is one scenario.

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We now have the 4.99% mortgage rate from SBS. 5 year fixed.  As predicted. 

This will provide good competition for the Aussie banks. 

http://www.stuff.co.nz/business/money/67151009/sbs-bank-aims-for-north-island-customers

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