RBNZ's Bernard Hodgetts on the regulator's about face on Auckland specific LVR restrictions, and why the 70% landlord LVR limit was chosen

RBNZ's Bernard Hodgetts on the regulator's about face on Auckland specific LVR restrictions, and why the 70% landlord LVR limit was chosen

By Gareth Vaughan

The Reserve Bank settled on a 70% loan-to-value ratio restriction as the upper limit of how much residential property investors can borrow when buying a house in Auckland due to analysis of global investor markets.

So says Bernard Hodgetts, head of the Reserve Bank's macro financial department, who acknowledges the analysis has "no hard science" behind it. The new restriction, planned from October 1, is expected to cover about half of all lending to Auckland residential property investors from banks.

Hodgetts spoke to interest.co.nz yesterday after the Reserve Bank, among other things, unveiled plans to require residential property investors in the Auckland Council area using bank loans to have a deposit of at least 30%. From the perspective of bank lenders, it's proposed the "speed limit" on such lending will be set at "close to zero" of new lending flows.

Hodgetts said deciding to go with the 70% loan-to-value (LVR) figure reflects the Reserve Bank's analysis of investor markets internationally, and the relative risk characteristics of investors versus home owner-occupiers.

"I guess the broad message out of that analysis is in terms of investor risk, it tends to be greater for any given LVR relative to owner-occupiers. And so a 70% LVR for an investor, in broad terms, is probably closer to an 80% LVR for owner-occupiers given the relative level of risk between the two types of borrowers," Hodgetts said.

"There's no very hard science behind that. But that's the broad finding that one takes from the international work looking at relative risk characteristics of investors during a severe market downturn."

"Something in the order of about 50% of investor activity that involves borrowing from the banking system takes place at LVRs of greater than 70%. Most of that is concentrated at LVRs of between 70% and 80%. There's very little currently happening at LVRs greater than 80%," added Hodgetts.

The Reserve Bank says this data comes from its surveys of bank lending, gathered under its prudential regulatory powers, but not published.

Applying LVR restrictions regionally 'not necessarily an easy thing to do'

The Reserve Bank also announced yesterday it was increasing the existing speed limit for high LVR borrowing outside Auckland to 15% from 10% reflecting the more subdued housing market outside of Auckland. It's also retaining the existing 10% percent speed limit on bank lending to owner-occupiers in Auckland at LVRs of more than 80%.

Establishing geographical boundaries for LVR lending restrictions is something of an about face by the Reserve Bank.

When it introduced the initial LVR restrictions in 2013 the Reserve Bank said geographic targeting would be administratively complex, and would require difficult decisions to be made defining problem areas. Furthermore it would be more complex and costly for banks to implement, and difficult for the Reserve Bank to monitor and enforce.

Asked what has changed over the past two years Hodgetts said a number of things had, albeit that didn't mean applying LVR restrictions regionally was likely to be particularly easy.

"But I think a number of things have changed. The first is that the difference in housing market conditions between Auckland and the rest of the country is so much more stark now than it was back in 2013 when we originally brought in the LVR restrictions. I think at that stage we were seeing housing market pressures and house price inflation through a number of different parts of the country, not just Auckland. Now of course we're seeing much stronger house price inflation in Auckland than in the rest of the areas outside of Auckland, (which) by and large are pretty subdued," said Hodgetts.

 "We feel the banks have had a bit more experience in administering loan to value ratios through the fact we've actually operated them over the last 18 months or so, and also our data flows around LVRs are considerably better now than they were when we first brought in LVR restrictions. So we've been doing a lot of work to try and get better information on the composition of markets, who is driving them, where the strengths of the market are, and that kind of thing."

 "Not to say that applying LVR restrictions regionally is necessarily an easy thing, but we do feel our capability to do it has probably been improved," Hodgetts added.

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"Something in the order of about 50% of investor activity that involves borrowing from the banking system takes place at LVRs of greater than 70%. Most of that is concentrated at LVRs of between 70% and 80%. There's very little currently happening at LVRs greater than 80%," added Hodgetts.

50% or so between 70-80% LVR (assuming 'very little' = close to zero at LVR greater than 80%). Thats a lot. Shows how most investors like to keep equity at or close to 20% to be using their equity 'efficiently', so as pirces in auck rise, and their equity gets too far above 20%, they buy another to bring it back down. Now the level is 30%, they'll have to wait until equity gets to say 40% in current portfolio before buying another to bring it down to 30% again. And every new purchase 'absorbs' an additional portion of equity so takes longer to recover or 'recycle' the deposit in order to buy the next.

And heaven forbid if prices do fall those investors will have nothing to recycle. In fact with a negatively geared property they will continue to feed their investments money while losing equity.

Wont happen , prices will not fall any time soon , there are 1 000 new faces arriving at Auckland Airport every week and they all need somewhere to live

In terms of the rules to get in the door they need Money or skills or both and as we all know anyone with money or valuable skills will want to buy rather then rent .

Add offshore money borrowed at 3% to the mix , and you have a sure one way bet ( for now ).

Add to that the costs of subdividing a section , then putting in services which add $100k to the price

And finally the foreign buyer gets a 3 bed house and land on the Shore for under $1 million when in HK or Shanghai he would get a dirty little 30m2 bedsit on the 25th floor with the bedroom and lounge and dining room all in one room

Prices are simply unlikely to fall anytime soon

As the number of properties go up the percentage that each has to increase by in order to buy the next property is reduced. when you have 4 you'll need 37.5% equity to buy number 5 and retain 30% equity. When you have 5 you'll only need 36% (assuming the new property has the same value as the old ones).

Given the rate of property price inflation is in double digits, investors with 3 or more properties should still be able to grow their portfolio at a rate of 1 additional property per year.

This LVR limit is a nonsense......it is a breach of Constitutional Rights.
The 1688 Bill of Rights provisions for Ancient Rights !!
The Treaty of Waitangi even provides for all people to be protected!!!
NZBORA - 28 Other rights and freedoms not affected

An existing right or freedom shall not be held to be abrogated or restricted by reason only that the right or freedom is not included in this Bill of Rights or is included only in part.

UNIVERSAL DECLARATION OF HUMAN RIGHTS.

NOTE PROPERTY !!!
Article 2.

Everyone is entitled to all the rights and freedoms set forth in this Declaration, without distinction of any kind, such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status. Furthermore, no distinction shall be made on the basis of the political, jurisdictional or international status of the country or territory to which a person belongs, whether it be independent, trust, non-self-governing or under any other limitation of sovereignty.

ALL ARE EQUAL BEFORE THE LAW!!
Article 7.

All are equal before the law and are entitled without any discrimination to equal protection of the law. All are entitled to equal protection against any discrimination in violation of this Declaration and against any incitement to such discrimination.
ARE YOU READING THIS RBNZ?

Article 8.

Everyone has the right to an effective remedy by the competent national tribunals for acts violating the fundamental rights granted him by the constitution or by law.

DOES THE RBNZ ACTUALLY KNOW WHAT A GROUP ATTACK IS.....THIS IS STATE SEGREGATION BUT YOU GOT AWAY WITH IS ONCE WITH THE FHB'ers SO YOU THINK YOU CAN DO IT AGAIN.
Article 12.

No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.

Article 29.

(1) Everyone has duties to the community in which alone the free and full development of his personality is possible.
(2) In the exercise of his rights and freedoms, everyone shall be subject only to such limitations as are determined by law solely for the purpose of securing due recognition and respect for the rights and freedoms of others and of meeting the just requirements of morality, public order and the general welfare in a democratic society.
(3) These rights and freedoms may in no case be exercised contrary to the purposes and principles of the United Nations.

Article 30.

Nothing in this Declaration may be interpreted as implying for any State, group or person any right to engage in any activity or to perform any act aimed at the destruction of any of the rights and freedoms set forth herein.

SO YOU CAN'T OWN PROPERTY UNLESS YOU MEET THE RBNZ THRESHOLDS....Well some people had to put Gold in their teeth and escape across the borders!!!
Article 17.

(1) Everyone has the right to own property alone as well as in association with others.
(2) No one shall be arbitrarily deprived of his property.

These LVR limits are the most dangerous pieces of policy to hit NZ in years.....All those suffering from Little Emperor syndrome at the RBNZ need to be enforced to resign now!!!

Not sure how sarcastic your post is meant to be, but the RBNZ is only reducing the amount someone can borrow and not touching property rights.

A libertarian point of view to the core. They seem as a collection of extremists unable or unwilling to comprehend that the action of one can result in bad things happening to others.

Ha a Socialist point of view to the core.....They seem as a collection of extremists unable or unwilling to comprehend that the action of one or the group can result in bad things happening to others......and then they get close to being found out they then attack others!!

Do "the others" bear responsibility?

If not, then what is making me "the one" doing the gondoleering to make raw supplies, and them the ones having the party, paid more for being entertained.

A friend of mine involved in a volunteer organisation. they were having a large area meeting with entertainment, my friend despite being of the correct level and very active (too active) in their socialist organisation wasn't invited.
she was told she could go too because they were looking for people to do the catering work. seriously.

My (coloured) friend was not terribly impressed about that but that is how many of the socially motivate view things. They were equal, we all come to the event, but only some (others) are expected to actually provide real skills and labour.

Seldom do I see a socialist who sees themselves as part of those who will labour.

No borrowing can take place without the ability to pay Where has the RBNZ taken the ability of an individual to pay into consideration??? Hitler proved much on group therapy for the masses !!
When a Society becomes so structured that all decisions are made by the State then start thinking about the new flag!!

yes indeed they are thinking about a new flag.
The thing to watch for is the rats.

that is your major property right is a banking based capital society (your credit limit)

and what about my rights being impacted by the stupidity/greed of people? ie I as a tax payer and my children who are too young to vote so cannot object to being left with decades of Govn debt?

How are your rights being impacted????

I think you are getting very confused on issues of Government debt......you want all the Social pandering that can be provided as long as someone other than you has to pay for it. You then use your children as an excuse to let the circus continue......

It is not the States roll to interfere in private business transactions!!!

Do you want a true peasant class of people in NZ?? That is where you and your kids will end up if you keep this Socialist nonsense up..

I think the tax office (including GST department) seem to have missed that memo.

I sell secondhand company goods to a friend. why do I owe the State a cut?

....presumably because your company is registered for gst and thus you claimed back the gst on the product when you purchased it. If you buyer is gst registered, he will then claim on the gst you charge. In this scenario, govt get zip. End user pasy gst, so if he is not registered, then he can't claim (being the end user).

it's a private transaction.

but yes, you are correct. but State is not a party to this transaction.
Just as it is not a party in my contract that pays me per diem, but the State insists it has a say but contributes nothing to what is a private matter.

To a degree, the ability of wealthy individuals to take advantage of reckless lending by the banks, breaches the proviso which qualifies the philosophical basis which underpins the notion of "property rights" that was first formulated by John Locke.

"Locke thought that this challenge could be met if it could be demonstrated that an act of appropriation was not “any prejudice to any other man” (II. 5, 33). If my claiming a piece of land as my own doesn’t make you any worse off, in other words, then you don’t have any real grounds for complaint. And so long as my act of appropriation satisfies the so-called “Lockean proviso” of leaving “enough, and as good, in common for others,” Locke thought that this condition would be satisfied (II. 5, 27).
http://www.libertarianism.org/blog/locke-nozick-justification-property

On a broader scale it is actually the actions of the Councils in New Zealand which set up the conditions that have resulted in the predicament Aucklanders are in at the moment.

http://www.rmastudies.org.nz/library/43-smart-growth/192-are-metropolita...

This shows why you fail or more likely do not wish to understand "All are equal before the law and are entitled without any discrimination to equal protection of the law." There is no discrimination based on sex, race or belief. ie "without distinction of any kind, such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status."

By any chance did you fail comprehension at school?

I comprehend what the piece is saying and not your view of it.

Simple, go get a legal opinion if you think you have a case.

"property"

Which is the basis for the LVR, and also the increased LVR. The danger is that the bar will be changed in the future in order to control the market, or to do favours.

Technically it is again everyone who has achieved that level of property so isn't really that discriminatory, but it is leading into an issue of whether two cheap properties is same or less than two expensive properties... eg someone living cheaply who is a minor party in a property syndicate.

It also is selective against those would buy in Auckland (especially those who live there already, having a much higher chance of purchasing in Auckland) vs people who are not in Auckland.

that's the problems you get with "One rule" situations. They always affect people indiscriminately and therefore unevenly. As the saying goes "One rule for all equally so neither the rich or the poor can sleep under bridges or steal bread" (from one of my favourite "Tomorrow People" episodes).

After all we are constantly discriminated against by the State and it's connections based on race, colour, gender, belief, prosperity. Those who are considered "privilieged" by others who consider themselves "unprivileged minorities" consider standing up for yourself and pointing out the discrimination as privilege and oppression. so what's why bother any more

Basically the system is broken... Figure it's up to those "unprivileged" folks to make everything better (I just won't do the work for them any more)

I think "notaneconomist" has a point.
It would be interesting if an expert in Human Rights were to give an opinion on the issue.
It seems that there is an argument that a group of people have been discriminated against for no other reason that they are seen to be financially advantaged but not doing anything illegal .
Instead of name calling and insults, let's have some honest feed back.
Particularly: Article 17.

(1) Everyone has the right to own property alone as well as in association with others.
(2) No one shall be arbitrarily deprived of his property.

However everyone also has a right to be protected from the stupidity of others. So if you want to buy houses and utilise huge bank loans at terrible LVRs and it goes badly then I as the tax payer have the right to not be impacted by your greed and stupidity.

You also have to look at the intent of legislation ie when MPs voted for it what was their intent. This is something that a judge/court may have to determine btw of the law isnt very clear I believe. In this case the intent appears to be is there a group of ppl who is being discriminated against? no. ie the only criteria here is that some do not earn enough and/or have not saved enough to be able to afford to gamble cannot. I cannot see how this is discrimination.

btw nature doesnt grant a person a right to a home, or food or life, a society does but that is under-written by nature. So sure you may wish that everyone has a home but if there isnt the materials and energy to do so it cannot happen.

You seem to be struggling with the meaning of DISCRIMINATION Steven!!
Discrimination is treatment or consideration of, or making a distinction in favor of or against, a person or thing based on the group, class, or category to which that person or thing belongs rather than on individual merit.

Everyone has the Right to be protected from discrimination!!!

It is, I believe, more of a philosophical question

Which comes first, the philosophical state or the discrimination and league of rights

Steven is correct at the philosophical level

How would Socrates and Co have dealt with it?

What about me being discriminated against as I am a tax payer? in effect this is not a trade of individual to individual, if it were I wouldnt have much of a problem, but it is not.

If you look at the law it says a group, ie sex, colour, orientation. The person's ability to pay? I'd hardly call that discrimination that is merit. What about if a bank says I wont lend past an LVR of 80%? which is how it was when I got my mortgage? So in effect you are saying that the borrower has the right to take money off the lender no matter the lenders wishes.

I am blown away

I was wondering how they arrived at 30% as the magic number they would use to seriously interfere with the only textbook example of a free market in the whole of New Zealand.

The existing LTVR rules have clearly had no effect at all .

Now we know , there was no rational economic theory applied whatsoever .

Its a disgrace

Free market needs true competition. Investors who claim tax rebates against interest, etc are not true competition with owner occupiers that can't.

A true free market wouldn't have interfering RBNZ, Councils, IRD etc....

DEFINITION of 'Free Market'

A market economy based on supply and demand with little or no government control. A completely free market is an idealized form of a market economy where buyers and sellers are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation.

Read more: http://www.investopedia.com/terms/f/freemarket.asp#ixzz3aB6VjOGq

ok Mr Boatman

Lets level the playing field

Let's make all mortgage interest tax-deductible - for everybody

and for those that are renting or those that don't have a mortgage, a tax credit or refund of $5,000 per year, every year, and indexed to the HPI housing-price-index

And see what the fall in tax-revenues does to the National Deficit

And then see what measures Bill English has to implement to achieve a surplus

and why are we dis-advantaging those with no capital? ie ppl with only labour to offer pay the full and indeed more tax on their incomes while those who sit and do nothing get tax free incomes.

yes thatt makes sense.

Ms Free-Marketeer Ms Notaneconomist will love it - it's non-discriminatory

indeed zero tax all around, oh wait that is anarchy, that's Ok I can protect myself. In some ways I like anarchy as it allows you to truly do anything you want. ie want a "society" and each person pays in? yep no problem. Not want to pay in? well f*** off then.

I mean if Im not allowed a public health service why am I forced to pay for a military, police and court system?

indeed, why are you?

I'm not allowed a free masseuse (or even minimum wage) why should I be paying for your public health system (with it's corrupt overpaid vultures)

Did someone steal all your toys out of your cot Steven??

How the heck do you think people get started in life??

It is an individuals choice to sit and whine or get the heck on with living. Why should people who choose to get on with living be disadvantaged by those who choose to sit and whinge?

If you've got no capital but got attitude go see a bank with your plan.....it is simple and easy.....what most lenders want to really know is what type of attitude you have!!!

We are all trading our time so it is a nonsense to suggest that ppl with labour only cannot get ahead.
What you are really advocating is that people who don't want to be in business should have their lifestyle/income protected and you have nominated your sacrificial lamb!!! The tax is how you fund the system you want!!!
.

my lender wanted to know (a) what my income was to service their debt, (b) what security I had, and (c) how they could maximise their access to (a).

Attitude didn't even enter into it.

Fewer investors means higher rents, can't wait to put mine up 5% next year...all my bills have gone up, rates, insurance and now theoretically I can't get any more investments, so better sweat the assets I have, stupid rules like this will make me do stupid things, after all I am just a greedy landlord and not contributing to the nz economy even though have been running a cash loss for over ten years letting other people enjoy their lives with my capital

Fewer investors will mean more realistic house prices, more owner occupiers, smaller pool for landlords to draw on, ergo lower rents

no. fewer investors means those few are the bigger holders, and are the game setters with less competition.
Same number of renters, fewer service providers. hence more rent (less competition)

I take all the risk as my properties are built in 1910 and is just a treat, nothing ever breaks, like the windows, growing mold, fireplace blockages, back clothes line, leaky main roof, car port roof ripped off, in-sinkerator broken, over grown garden, smashed fence, plumbing stuffed, electricity sockets rusted, outhouse a complete shambles and my previous tenant ran off with $800 of the bond, nice one....surely i don't deserve any capital profit, much better i give all my (evil) earnings to the government in forms of interest charges write offs and CGT...why should i make a profit at all?