David Hargreaves looks at some of the options for dampening demand in the housing market while we wait for the supply of housing to catch up

David Hargreaves looks at some of the options for dampening demand in the housing market while we wait for the supply of housing to catch up

On the face of it, the suggestion by Kiwibank economists that the Reserve Bank should move to force banks to more highly price riskier home loans such as interest-only and investor loans, is a good idea.

As the country yet again grapples with an overheating housing market, anything that might help is worth considering, although it should be immediately added that the RBNZ does not directly target house prices. Therefore any such move by the RBNZ would likely be considered by the central bank only if it saw it as assisting financial stability.

To the extent that charging investors more for their money might discourage some from over-stretching themselves, then presumably this would assist with the financial stability aims.

However, as with all such things, what needs to be guarded against is the unintended consequences. And there have been a few 'good ideas' over the years that have come unstuck due to consequences that weren't first foreseen.

One thing that comes readily to mind as a seemingly good idea gone bad is the Auckland-centric loan to value ratio (LVR) limits that were introduced by the RBNZ in 2015. The RBNZ had itself been against such an idea before deciding to implement the measures in the face of a rampaging Auckland housing market.

In the event, the big unintended consequence of that measure was that Auckland investors started moving further afield for house buying opportunities - and this helped to ignite the housing market in the rest of the country, without any noticeable cooling in the Auckland market.

It was only with the advent by the RBNZ of tough deposit limits (then 40%) for investors right around the country in 2016 that heat started to come out of the whole market.

Deposit limits to return

As of March 2021 the investor deposit limits, which were removed in May last year along with all the other limits around high LVR lending, will be reintroduced, though probably at the 30% level that last applied.

So, what of the idea of also putting a higher risk weighting for banks on investor borrowing? The impact on the banks would be that they would need to hold more of their own capital against investor loans - and therefore would charge customers more highly for such loans.

Theoretically this would do two things; it would dampen the enthusiasm of investors a little, and it would provide greater financial stability - via the increased capital held by the banks. So, this would help.

However, there is then the concern about unintended consequences....

What would happen? Would investors all still happily climb into property buying at the same rate they do now anyway? And would they simply then pass on their increased interest rate costs as rent to tenants of their properties?

Doubtless, the ready answer from investors is that this is exactly what they would do - or at least seek to do. 

It's complicated

It is a bit more complicated than that though. Because obviously rents can only be increased if the the 'market' will tolerate it.

We know though that there is a shortage of housing.

Indeed that's the heart of the whole problem. 

Any moves therefore targeting investors must be carefully framed so that they don't promote big increases in rental costs, at a time when people are struggling to raise deposits to buy their own homes and at a time when the amount of new homes being built is still not seen as enough.

Remember though that the Reserve Bank is resistant to the idea of being forced into the role of controlling house prices as it demonstrated in its response to Finance Minister Grant Robertson's suggestion of including house prices in its monetary policy remit.

Seeking DTIs

The RBNZ wants to stick with targeting financial stability - not be given some big stick role directly policing house prices.

In its response to the Finance Minister just before Christmas the RBNZ requested that the Government gives consideration to adding restrictions on debt serviceability (that would include debt to income limits) to the RBNZ's 'macro-prudential toolkit' in 2021.

The idea of having debt to income (DTI) limits has been around for a while. The RBNZ tried to have them put into its toolkit before the 2017 election but got strong pushback from the then National-led Government.

It's not clear that this Government would be any more enthusiastic.

While DTI limits are a good idea, one potential drawback is that they would tend to act against first home buyers, who of course tend to be the most stretched financially when buying homes.

The best thing would be to avoid the first home buyers having to stretch themselves so much in the first place, but that then brings us back in circular fashion to the desirability of cooler house prices and for the provision of more affordable homes.

In terms of what happens this year, the Government has to step up to the plate. Whatever it can do to facilitate an increased supply of housing and to make housing more affordable for FHBs it needs to do.

So supply must be the key.

Dampening demand

In terms of demand though, what might be realistic to expect from the RBNZ this year to assist - assuming the Finance Minister's efforts to get house prices included in the monetary policy remit continue to be rebuffed?

I still think the best short term cold shower for the housing market could be provided by pushing up deposit limits for investors. I don't think a 30% rule will do enough to cool the market in the immediate future and I would still like to see that deposit rule brought back in at 40%, or maybe even 50%. Just for a while. Just till things are more back on an even keel.

Then, longer term, I think it is worth investigating a policy for banks to have increased risk weightings on investor and interest-only loans, reflecting the perceived higher risk nature of them. 

I still think we need a few things putting in place in this country that encourage people to look beyond just houses as a place to invest money. We keep putting all our eggs in the housing basket. It is a risk.

Now that any capital gains tax has been taken off the table for the foreseeable future what are the kinds of things that might provide incentives to people to diversify their investments?

Balancing the options

Well, certainly the idea of banks having higher risk weightings for at least some categories of investment loans is something that should be considered seriously and may act to balance kiwi investment options a little more in future.

We would need to keep an eye on what such a policy might do to rent prices though.

In general terms though, any measures that might help check demand at the moment should be considered, while the housing supply situation is sorted out.

Whether this Government is able to do anything convincing on the housing supply side though remains the big, vexed question.

Virtually nothing was achieved despite big promises between 2017 and 2020. Now, with Labour governing alone, there are no excuses at all.

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68 Comments

'what needs to be guarded against is the unintended consequences.'

By definition, to the ignorant, everything is an unintended consequence.

They will not admit they are ignorant, therefore everything that has happened must be by design.

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Apply harsher deposit requirements on investors buying existing homes, but not new builds.

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Stop interest on mortgages from being tax deductible on all residential property. I do not consider housing speculation/investing a true business.

Great idea, but I wouldn't take bets on the Govt doing it. I don't know when they went from "let's do this" to "let's do nothing"?

The numbers dont really stack up on building new homes for rent. As an example, a brand new home close to me is valued at $1.1m but its available to rent for $670 per week. Thats a gross yield of 3.2%. By the time you deduct interest, insurance, rates, vacancy periods, letting fees, repairs and maintenance, you would be well in the hole, and there are no tax breaks from negative gearing anymore to help you out. Far better off selling that $1.1m home and buying an established property with better rental returns.

Maybe, maybe not, until you have factored in capital growth and looked at the annualized rate of return over a certain time period, for that individual property, then you can't say.

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Sitting at a desk fiddling around with financial instruments and settings will not solve the problem.
We need to build houses, urgently, lots of them, at a competitive and lower cost. Everything that gets in the way of this needs to be swept aside with urgency.

Precisely. Build. Build, build, build, build, build. Not that hard really. Anything else is wasting time.

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Takes a while to build a house though. Something needs to be done in the interim, so attacking demand by levelling the playing field between investors and owner occupiers is the answer.

The stats I've read suggested if anything net migration has gone backwards from previous years. So there shouldn't be any more people than usual needing a place to live (whether renting or owning) - its just that there is a whole bunch of extra demand from investors (seeking somewhere to park their cash).

Think we might need a tally of unoccupied and houses dedicated to Air BnB etc in non resort areas.

PA... there are prolly far more air B n Bs than people imagine. While house hunting last year I saw more than a few that clearly were (numbers on bedroom doors a giveaway).

To proceed as a knee jerk reaction and throw away planning & proper thought will always result in a bad result and yes.... unintended consequences.
I know a lot of people are very desperate, but we need to be thoughtful. Sweeping aside the rma for example in some areas is a very good idea. Where other regions this could have disastrous long term consequences. Think Queenstown & Wanaka.
Please! Proper answers to these problems will require real planning and long term thinking.

We have had decades to build enough houses that meet the nice to haves. Far too late now. the choices are a warm dry bed or the street, or would you rather have the containers in peoples back yards that are now springing up and being rented for $350 per week. We are now getting very close to shanty towns- go to Northland. It is all very nice and arguably highly selfish to sit back from the comfort of your own home denying that from others because of your own selfish aesthetic sensibilities.

It really depends on where in the country you are talking about. Aesthetics in some parts of the country are incredibly important. They have been been used to sell tourism & the film industry and have built nz up a reputation as one of the most scenic and desirable places in the world.
Throwing the rma out the window in some places may be appropriate, but in other areas a disaster.

Look at the few real examples that we have.
The RMA was thrown out the window for the Canterbury rebuild. I cannot think of any problems that resulted. Officials were still keen that they did a good job and apart from the unrelated issue of insurance.
The Kaikora rebuild was very much fast tracked and great care was taken over matters normally covered under the RMA. Any problems there - no. I know someone who lead one of the NECTAR teams and his comment was that environmental matters were very tightly managed. You would have to say that they have done a superb job and it is hard to see how years of RMA process and enriching fat cat consultants would have produced a better result..
Look at some of the awful buildings that have been built despite being regulated by the RMA. In the Queenstown industrial area adjacent to the airport, there is a building that looks like a whole bunch of containers stacked on top of each other. It was build to fill the desperate need for backpacker/single person accommodation, so justified on a needs basis; but gosh it is ugly against the backdrop of the Remarkables. If that is an example of how effective the RMA is, I don't think we have much to loose.

Yes exactly, the rules are well established with environmental matters, etc. All the present RMA now does is slow the process down to give justification for all the revenue gathers to make it look like they have earned their fees.

It would be far more honest of them if they just stayed at home and sent the bill in.

There is NO housing supply shortage. What do you see 20,000 families out there living in cardboard boxes?

Producing more houses will just result in more landlords buying houses.

The problem is:

- debt levels & the easy credit we are using.
- Our tax system that encourages this behavior.
- MSM (paid for by RE agencies) constantly whipping up FOMO.

But cheap credit is the primary issue & even this is driven by external factors (its a global trend).

They're all living in motels courtesy of the taxpayer's dime.

There is a big excuse now for no action - it is that the PM wants to bring people along on the journey to lower house pr...I mean affordable houses. She doesn't want to risk people thinking something has been "done to them".

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They also need to get off their Woke high horses and start a conversation about NZ's future population.
We need a clear strategy, and as part of that a robust discussion about the type and volume of immigration.
This is critical for a whole host of reasons - housing, healthcare, education, employment, the environment.

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It is incredibly frustrating that everyone recognises the role in increasing supply - building more houses - will help alleviate our housing crisis. Yet so many people simple skip over the fact that the other side of the equation - the additional demand that is being created by our immigration policy.

I'm not saying we shouldn't' have immigration - we just need to have a conversation about what level of immigration is appropriate and how we will provide the infrastructure to support it (and who will pay for it all). Right now we successive governments are happy to just cram more people in - knowing it will give a short to boost to the economy - but make no plans to provide the infrastructure and funds to properly house and support ththe increased population.

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Miguel. The influence of identity politics on media is now so pervasive that the frank immigration debate you are proposing and which we desperately need will not occur. Views that our immigration levels have been unsustainable can now only be expressed publicly in a carefully nuanced fashion to avoid being accused of xenophobia or racism. So we glide gingerly round the elephant in the room and witter endlessly on about tinkering with tax, DTI's, LVRs, anything except the obvious reality that we were never going to cope with the massive influx of the last 10 years. Now it's Midnight Oil time for us to pay the rent, or at least for our kids to.

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Exactly.
The rhetoric is often simplified to pro-immigration (= good) and anti- immigration (= bad and xenophobic) poles.
Like you, I am not anti- immigration. I AM anti indiscriminate and extremely high volumes of immigration.
My gut feeling is that rates of immigration need to be halved. But proper analysis needs to be done, and a range of views need to be heard and considered.

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Fritz. If by 'proper analysis' you imply that an objective cost benefit analysis based position on immigration is possible I admire your optimism. The much loved by politicians amorphous cultural 'diversity dividend' justification for NZ having one of the highest developed economy migration rates is well entrenched. A flawed perspective that our country is sparsely populated with rich natural resources and thus we have plenty of room to accomodate a much larger population seems to also inform their thinking. The demands of industry appear to carry far more weight than does the citizenry grappling with the weight of excess demand for housing and infrastructure.

Yes...

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Why halved? We have a huge (actually inconceivable to those outside LG) infrastructure deficit by way of deferred maintenance as it stands - we should be reducing our population, particularly in cities. Auckland and Christchurch are facing massive freshwater issues going forward - South Dunedin is sinking - Wellington's underground infrastructure ruptures under the busy streets on a near weekly basis.

Stop growing and start triaging in the name of those that are here - as PDK has tried so tirelessly to tell us all.

Wasn't anything scientific to that just a gut feeling.
I think we still need quite a few immigrants in areas such as healthcare, aged care, teaching etc.
Plus I don't think anything more than halving immigration is realistic.

Interesting. To my mind only no growth is realistic. In fact, were it not for global QE, it's hard to imagine that any economy has 'grown' in a real sense in the last couple of years.

It would take an article not a comment to explain why but I agree halving immigration is as far as NZ can go realistically. That would still leave us high on the list of legal immigrants per capita by country. However it would be good to see that as a target - but we have to encourage the well paid immigrant and discourage the low paid and easily exploited immigrant.

Productivity Commission has recently come out and said we need to change the strategy away from importing cheap labour to higher skilled individuals. Why on earth do we need to import Bus drivers? That's right, because business wants to keep their margins by screwing pay rates down. Thats a one way trip to a low wage economy.

.

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I agree Fritz its time we had a discussion about capping the New Zealand population. Time to throttle back immigration big time. As people leave, then new people can enter but there needs to be a maximum number of people in this country. This country is full, its time to close the doors.

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It’s not time for a discussion I think it’s time for action. As you said, have a max population for everyone out, we get one in. The immigration entry points have so many loop holes and has been abused and is being abused. For starters they need to remove the work visa post study visa effective immediately. You are here to study not gain residency. That’s a seperate channel and please go through the PR process.

I agree with Miguel, middleman and the others above.
I think it more practical to decide a population policy, a "population cap". Immigration is but one component of that. There are others.
Then, having got rid of the quite bizarre population explosion we can work on improving incomes, and reducing costs for New Zealand citizens.

I don't agree with a cap but I do think sustainability has to be kept in mind in regards to the roads, housing and other infrastructure. The government has an easy tool to change it on a whim which can achieve that, why don't they? I'm sure the ponzi will be back once covid is under control or gone.

I'd partially agree. I think the problem is not so much the population quantity as it is the distribution of the population. To my mind, some cities such as Auckland and Wellington are showing strain on already identified sectors such as health, housing, schools, roads etc.

Once remote working becomes widespread and desirable then perhaps pressure on these cities might ease. Or perhaps not as people choose to live there for reasons such as being close to family or desirable schools or unis. Perhaps these suggestions are cliché.

My point is that I think yes, the discussion needs to include not only immigration but also discussion about how to make living in other areas outside of the main cities more desirable.

July will mark the seven year anniversary since the RBNZ last raised the OCR, and most likely, the longest period of continual decline. With those resetting mortgages , particularly over the next 18 months, and given the prevalence of the two year fixed they will still reset 150-200bps lower. No reason to sell the house and go renting, just yet.

Its still the time to buy Cowpat, NZ history has shown its never been the time to sell and go renting. I was out of the property market by necessity for a couple of years and just back in in time last September. Just in time as it turned out.

Remember though that the Reserve Bank is resistant to the idea of being forced into the role of controlling house prices as it demonstrated in its response to Finance Minister Grant Robertson's suggestion of including house prices in its monetary policy remit.

Employing leverage, whether its bank capital or bank borrowers speculating when unrealised asset price gains constitute deposit capital, should be subject to serious regulatory control undertaken by the RBNZ.

This type of financialisation is a privilege not a national right.

So, so, so, so true.

It's really simple. And really within their remit. No cash savings as a deposit - no house. That's the case for first home buyers.

Hi David, No suggestions will help as this ponzi is what government and Mr Orr wants.

Why is anyone surprised, am witnessing rise of house price by 5% to 10% on a fortnightly basis since October and in some place even higher.

House with CV 950 were selling between 900 to million (even at that time RV was of 2017) and in October from million to million 50 thousand and in November from million 50 to million 150 and in December from million 150 to million 250 and now from million 250 to million 400.

Do not believe check with anyone related to housing market and can one believe that government or RBNZ is not aware. From June 2020 to June 201 rise will be anywhere between 50% to 80% unless someone acts to remove FOMO.

I have heard a few anecdotes of some crazy prices way over valuation, over the past couple of weeks...

I would behappy to see houseprices slide downwards. And I own more one than now.
(sorry prime minister)

LOL. I found a homes.co.nz mid-point valuation had changed from $905K yesterday, to $1.07M today. Spoke to the RE agent. She had submitted the change on "re-valuation". So, I asked for the valuers report. No, it was the REA's "re-valuation".

It's a serious ponzi - that kind of behaviour ought to be illegal.

Agents are not allowed to do valuations, they can only do appraisals?

Oh, maybe that was the word used.

They are not allowed to use the word valuation, only valuers can.

Trying to quash demand while waiting for supply to catch up is akin to finding a forgotten gun in the basement- it may fire in both directions.

You kill the demand for housing, you will also kill the incentive to build. If I'm in the house building business, if the government is dead beat on killing housing demand, I'll stop building and focus on my renovation and landscaping businesses.

Every innovative solutions in moderating house prices had been explored and I don't see any new ideas been any different from the past.

Time spent on hoping a silver bullet appearing has a tremendous cost on those who bank on hopes and dreams- it cost them over $323 every single day.

Be quick, before the train departs. Or if you chose, there's nothing wrong being a renter for life.

My suggestion higher up addresses this ie. Increase investor deposit requirements for existing houses, but not new houses.

Sure reduced demand will affect building, but not to a harmful extent.
Reduced demand means those living in garages in South Auckland may well do better in the competition for better housing.

The damage is already done. It's too late.

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You are probably right. It's just damage control now which might even be futile.
Nz has been forever changed in the last 15-20 years, for the worse (in terms of housing).
Slow hand claps for both major parties.

The damage was done in the preceding 20 years. Not just housing.
Societal damage has been of a similar magnitude
Forever

Not damage control, #rentcontrolnow - universal #rentcontrolnow.

And it could be done tomorrow.

The real looting of recent years and decades. Looting of generational and environmental wealth, to live up large now and pass on the cost.

Property investors never passed on the massive benefits of interest rate cuts onto rents, so the idea that tenants will pay more is just a boogeyman to scare RB and government off the idea of tightening conditions for landlords.

Covid has impacted the rental market too as migration has gone to zero at the low end. This will be felt in 2021 as tenancies roll off and demand pressure eases.

Because obviously rents can only be increased if the the 'market' will tolerate it.

No. Rents can only be increased if the 'government' will tolerate it via increasing the Accommodation Supplement, or in other words, if wider 'society' will tolerate it. Sounds to me like wider society is waking up and has had enough of the subsidy - not to mention the fact that every time the government increases the subsidy and/or brings more areas into higher categories - up go house prices as well.

The entire farming sector doesn't get subsidised to the tune of $1.9 billion per annum.

I still think the best short term cold shower for the housing market could be provided by pushing up deposit limits for investors. I don't think a 30% rule will do enough to cool the market in the immediate future and I would still like to see that deposit rule brought back in at 40%, or maybe even 50%.

Given capital values just rose (on average) 20% yoy - the 30% rule is really only a 10% increase on last year's capital value (or leverage on a second property, whichever way you want to express it) - and a 50% rule only gets us back to the 30% (that as you pointed out failed to cool the market last time).

And more importantly none of this will bring the price of houses down.

What will bring the price of houses down, is the ability for investors to charge less rent.

#rentcontrolnow.

Yes, I've been reading a number of the peer reviewed research papers saying much the same. And these paragraphs are worth repeating;

The supply narrative does two things. It helps stymie action on the demand-side, which might actually bring prices and rents down, while giving cover to governments who want to pretend to care about affordability for the middle class. And it is a useful weapon for developers seeking to gain various policy concessions, including rezonings from municipal governments, which deliver windfall land appreciation.

The vested interests behind the narrative are relentless, since there are billions in profit to be had. Why let pesky facts get in the way? Such interests, and their noisy Twitter allies, are trying to win the debate through sheer repetition.

However, housing affordability will suffer to the extent that policy makers either buy into the misdirection, or use the narrative to deflect public pressure to take substantive action. Sometimes, then, it’s helpful to point out that the emperor has no clothes.

#rentcontrolnow.

'including rezonings from municipal governments, which deliver windfall land appreciation.'

That is why you don't rezone the land prior to investigating, securing, and getting approval.

What you call the land (zone) pre and post having housing on it is just semantics but has a huge monetary negative to house prices if zoned pre.

Kate.. ive read ur those paragraphs twice. Theres no information in it.... Nothing... Just a rant against the idea there has been a lack of house building. Ie. Supply
I dont get it.. 1974 we built 34 000 house 2010 i think we built around 10000 house.
How can supply constraints NOT be one of the big issues to discuss...etc
Going down the conspiricy rant path seems silly

Using this stuff in support of rent controls , does not seem helpful to me.

I agree, I've read the article, he has this:

'the case for the supply narrative is so weak that, after several years of research in this field, I have yet to encounter a single academic peer-reviewed article which documents a substantial causal link between supply-side factors and housing unaffordability in Canada.'

So he hasn't read Evans and Bertuad for example. Or looking at how other jurisdictions like Texas, Singapore, etc. do it.

He seems to have dismissed the supply side, like others dismiss the demand side, without realizing that one affects the other.

There are numerous other questions to ask of him about the data behind his quoted numbers.

Interesting article, but I think he makes the same mistake (in reverse) as the 'supply-siders'.
It's more complex than both sides acknowledge. It's a multi-directional interplay between supply and demand factors.
But it's nice to get the view from the 'other side'.

Councils not so much the problem, its landbankers. Look at who got in early and grabbed all the big chunks on the peripheries of the big cities, and its generally just a few key players who are happy to drip feed sections out to keep prices high.

I am prepared to bet that reintroducing LVRs on investors will simply see rental properties disappear from the market faster than ever, increasing the rental housing crisis, and pushing up rents even further as tenants scramble for the few remaining rentals available. As there seems to be no shortage of FHBs in the market able to absorb the supply of ex-rental properties (most of which are exiting the market due to Labour's War on Landlords) the number of available rental properties will shrink. Also, if FHBs find it easier to buy established homes, they will stop building new ones. This will have big impacts on the overall supply of housing, and jobs in the construction industry.

Deposit requirements for property investors is irrelevant because we can always borrow our deposit off an existing property. In the UK they have reduced taxes for owners of rental properties by suspending stamp duty. We need more rental properties not less. Best way to do that is let me get on with what I and my competitors do best. Trying to copy us with State Houses is like giving the army gumboots.

If price of grocery, petrol hikes.. you can see govt. PR try to reign on them. Housing, not a chance - The real force behind it? is the easy credit flow from the Banks.
You can put DTI, LVR (not for business apart from housing) etc. - Banks will always find away - Now, here's an idea.. compare to OZ? check out list of NZ govt & RBNZ bromance with the Banks.

By "we", I presume you mean NZ? Please provide your reasoning for the increase in need.