By Bernard Hickey
Well that escalated quickly.
Less than two weeks after Prime Minister John Key told the Reserve Bank to "get on with it" and tighten lending restrictions for landlords all around the country, the Reserve Bank has proposed a major tightening within six weeks.
The Reserve Bank issued a consultation paper on Thursday morning proposing a tightening of lending to rental property investors across the country from September 1, and also a reduction in the speed limit for other borrowers with Loan to Value Ratios (LVR) of over 80%.
The Reserve Bank said a new LVR limit of 60% would be set for landlords across the country, essentially extending and lowering the current limit for Auckland investors of 70%.
The Reserve Bank said the changes were aimed at further mitigating "risks to financial stability arising from the current boom in house prices."
The New Zealand dollar dropped sharply after the announcement, which is expected to give the bank more leeway to cut the Official Cash Rate as early as August 11 to address a high currency and inflation below the Reserve Bank's target. Some economists now expect the OCR to be cut from 2.25% to at least 1.75% by the end of the year, with the potential for more next year, given annual CPI inflation has been below the Reserve Bank's 1-3% target band for nearly two years.
“The banking system is heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength. The proposed restrictions recognise the higher risks associated with such lending,” Governor Graeme Wheeler said.
The Reserve Bank said no more than 5 percent of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60 percent. Previously, Auckland rental property investors were limited to a 70% LVR and there was a 5% speed limit on any lending above 70%. The change effectively tightens lending for all investors beyond Auckland and lowers the LVR limit for all investors.
The bank also said no more than 10 percent of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80 percent. Previously, the speed limit for non-Auckland owner-occupiers borrowing more than 80% was 15%. This is an effective tightening back to the 10% speed limit seen until November last year. That loosening from 10-15% for non Auckland owner-occupiers would therefore have lasted 10 months.
The Reserve Bank said loans exempt from the restrictions, including loans to build new homes, would continue to be exempted.
"These proposed new restrictions would take effect on 1 September 2016 and simplify the LVR policy by removing the current distinction between lending in Auckland and the rest of the country," the Reserve Bank said.
'We need help from others too'
Wheeler then used his statement to call for further action from the Government to address the housing boom.
“The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy. Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority," Wheeler said.
“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country. A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy," he said.
“LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages. This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand."
Wheeler said he expected banks to observe the spirit of the new restrictions in the lead-up to the new policy taking effect.
Consultation would conclude on 10 August.
Debt to income multiple limits coming too
Wheeler said that the Bank was progressing its work on potential limits to high debt-to-income ratio lending, which would be a potential complement to LVR restrictions.
“We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential policy to include this instrument," he said.
The Reserve Bank said the new policy would result in a "significant tightening in credit availability for investors, and a small tightening for owner-occupiers outside of Auckland."
In the consultation paper the bank estimated the proposed limits would affect 70% of investor lending.
"Based on the current LVR distribution, the proposed nationwide investor speed limit would potentially affect around 70 percent of investor lending. The potentially restricted lending would be split roughly evenly between Auckland investors (primarily at an LVR of 60-70 percent) and non-Auckland investors (primarily at an LVR of 70-80 percent)," the bank said.
Reserve Bank figures show investors made up NZ$2.698 billion or 51.6% of the NZ$7.287 billion of new residential mortgage lending done in May, suggesting the new limits would affect around NZ$1.889 billion or 26% of all new lending.
ASB's Nick Tuffley said the Reserve Bank appeared to be acting with a degree of haste that seemed lacking in previous public statements.
"We had expected further measures, just not quite this soon. But the intention to put new lending restrictions in place means one potential roadblock to responding to the weak inflation environment will be reduced," Tuffley said.
"To us the announcement of new house lending restrictions reinforces the likelihood of the RBNZ cutting in August, given the very tight timeline proposed for implementing the added restrictions," he said, adding ASB still saw cuts in August and November to 1.75%.
First NZ Capital's Chris Green said the warning to banks to observe the spirit of the changes suggested the moves could start affecting the market quickly.
"The proposed tightening in LVR restrictions can be expected to further open the door for an additional easing in monetary policy," Green said.
"Moreover, given this announcement on proposed macro-prudential policy changes, we would assess that the Thursday release of the RBNZ’s economic assessment is likely to be more focused on dampening down the NZ dollar, which continues to remain around 5% above the Bank’s June MPS projection," he said.
ANZ's Philip Borkin said the announcement was a slight surprise "as it was only a few weeks ago that the Deputy Governor had downplayed something imminent."
"But we suspect the latest housing data, the broadness of price growth, and perhaps some additional political pressure has spurred the RBNZ into action," Borkin said.
Borkin said the case for investors having a 40% deposit was not overly strong.
"This is particularly considering the RBNZ’s own stress tests and the fact that most investor lending was already done at sub-70 LVRs anyway. Nevertheless, it clearly shows a desire on the part of the RBNZ to cool housing demand in a world where housing supply is slow to respond," he said.
Finance Minister Bill English said through a spokesman that any decisions were for the Reserve Bank to take, but he agreed with Wheeler that "fast rising house prices could pose risks for the financial system."
“That’s why the Government has a comprehensive and wide-ranging housing plan focused on increasing supply, removing roadblocks to consenting, supporting infrastructure for new housing, building houses on government land and tightening tax rules for housing," English said.
Labour Finance Spokesman Grant Robertson said the Reserve Bank's tightening of lending to rental property investors was the right thing to do, but it showed the Government was stuck in denial mode.
"The Bank clearly recognises we are in a housing crisis that is a threat to our financial stability. They are openly calling on the National Government to step up and fix the crisis," Robertson said.
“National has failed to address what the Reserve Bank described today as sluggish house building and they have failed to crack down on speculators," he said.
“Labour’s plan to fix the housing crisis includes banning offshore speculators from buying residential properties, an extension of the bright line test to five years and consulting on ending the practice of negative gearing."
Green Finance Spokeswoman Julie Anne Genter said the Government's lack of action against housing speculation had forced the Reserve Bank to act.
“It’s way overdue for the Government to show the same kind of leadership, and remove the tax advantages of property speculation," Genter said.
“The National Government is still the property speculator’s best friend – this Government has made it easier to buy a third, fourth, or fifth house, rather than your first," she said.
“In Government, the Greens would push for a capital gains tax on all properties except the family home, to encourage Kiwis to invest in more productive industries, and free up more homes for first-home buyers. The Green Party would also implement a Warrant of Fitness for rental homes, build more affordable homes, and restrict overseas buyers as part of a suite of measures to address the housing crisis.”
Property investor reaction
Property Institute CEO Ashley Church called on the Government to strip the Reserve Bank of the power to influence housing policy. See more here in Greg Ninness' article.
“This is essentially a u-turn. Two weeks ago we were told that these measures would be introduced ‘at the end of the year’. Now they’re suddenly sufficiently serious that they need to be introduced in 6 weeks’ time? What’s changed?," Church said.
“Could it be that last week’s serve from the Prime Minister has spurred the Reserve Bank into action?," he asked.
“If the Reserve Bank can now be politically influenced it calls into question the entire basis of its existence and the terms of the Reserve Bank Act. There was a time when the Reserve Bank could be trusted to act above politics, in the best interests of the nation. If that’s no longer the case – perhaps the Government should consider withdrawing some of the powers it has given the Bank – or even reviewing the Act”.
Church said the requirement to have 40% equity would be little more than a speed bump for investors and he called for a wide range of policies to address the issue.
“One-off, incremental and politically motivated, announcements won’t cut it. We have a runaway market and a generation of kids who can’t, now, afford to get into a home of their own. We need a comprehensive set of smart measures that send a clear signal to private developers, redirect investor activity into the building of new houses, and give our young people a fighting chance to buy their first home."
(Updated with more detail, economist, market and political reaction)