Opinion: Bernard Hickey finds the Reserve Bank remarkably relaxed about the Auckland house price boom. Too relaxed? And why no LVRs?

"Given this intense competition, what’s to stop another credit-fueled bubble developing?"

By Bernard Hickey

The Reserve Bank seems remarkably relaxed about the housing boom in Auckland.

Its December quarter Monetary Policy Statement essentially says it is watching house prices rise, but it is forecasting the inflation will moderate and that the inflation that’s already happened is unlikely to flow through to generalized inflation.

Here’s the quote:

“House price inflation continues to accelerate in some regions, particularly in Auckland. The bank does not expect this pick-up to substantially increase generalized inflationary pressures. House price inflation is expected to moderate, with house prices already very high.”

“Furthermore, given household focus on consolidation, it is unlikely that the current pick-up in house price inflation will have the flow-on impact to household spending that was seen through the mid 2000s.” It has issued a mild warning that it is watching the loosening of mortgage lending policies and would be concerned if that turned into ‘excessive’ house price inflation.

“There is a risk that house price inflation does accelerate further, particularly if supply is constrained by continued low residential construction. Excessive house price inflation would be concerning both from an inflation targeting and financial stability perspective,” the bank said.

But how much is excessive and at what point would the Reserve Bank actually act to dampen the credit-fueled excitement. High loan to value ratio lending is now much more prevalent in the housing market, particularly in Auckland.

I’ve heard this week from mortgage brokers that banks are starting to offer 100% loans to selected buyers. Competition between the banks has intensified in the last three months since ANZ announced its integration of National bank customers. Lending figures from the banks’ General Disclosure Statements show ANZ and ASB are at it hammer and tongs in the mortgage market in Auckland. Kiwibank is also nagging away on the sidelines, as is BNZ.

Westpac appears to have stepped back from the action for now. Given this intense competition, what’s to stop another credit-fueled bubble developing. The Reserve Bank’s own forecasts are that retail mortgage rates will continue to fall over the next year as lower funding costs on international markets and at home are passed on by banks with plenty of profit to spend on protecting or winning market share. Not nearly enough houses are being built in Auckland in particular.

The Reserve Bank’s warning about bank lending is in its Monetary Policy Statement (Box D on page 20), but it is fairly subdued and certainly doesn’t wave the big stick of Loan to Value Ratio controls.

Here’s the quote:

"Aggressive competition for mortgage lending and lower bank funding costs have seen mortgage interest rates reduce from already low levels. Combined with a relaxation of maximum loan-to-value restrictions by some lenders, lower interest rates appear to have increased the attractiveness of housing for potential first home buyers, leading to a rise in the share of high loan to value ratio lending throughout 2012.

“If the housing market continues to gather momentum, there is a risk of a stronger pickup in household credit and further increase in house price inflation.” “Such developments would have implications for the appropriate stance of monetary policy. Higher house price inflation and increased household expenditure would likely lead to higher inflationary pressures than is currently projected. All else equal, such a development would necessitate a higher OCR

” “Beyond the risks to inflation, the bank would also be concerned by such developments from the perspective of its mandate to promote the soundness and efficiency of the financial system. As reviewed in the latest Financial Stability Report, a credit fueled expansion in house prices would expose households and banks to a sharp fall in house prices.”

There’s no mention in the Monetary Policy Statement, therefore, of using other tools to slow down the lending.

We’ll see what comes out of the news conference with new RBNZ Governor Graeme Wheeler and his appearance before the Finance and Expenditure Select Committee in parliament this afternoon. The big question therefore is how much house price inflation and credit fueled expansion is too much. When would the RBNZ be forced to raise the Official Cash Rate to slow it down? It also begs the question: Why won’t the RBNZ use other tools such as Loan to Value Ratios to slow down the housing market without whacking the rest of the economy with its blunt instrument of a rate hike.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I for one don’t believe they want to stop it, they just can’t wait for all that borrowed money to hit the main street and make all their figures look good, all the cashed up sellers spending the borrowed money in the NZ economy.  So they can then claim what a great job they are doing with GDP growth etc, never mind that its just more debt.  At the end of the day that’s all this government and the reserve bank are in charge of, keeping the housing bubble going at all costs as they now realise that the NZ economy is just that, a housing market with few cows tacked on.

"Why won’t the RBNZ use other tools such as Loan to Value Ratios to slow down the housing market without whacking the rest of the economy with its blunt instrument of a rate hike".
For the simple reason that it would be first home owners who would be locked out of the market - permenantly.

But they could exclude first home buyers from such a rule...

Then they might as well have another rule that LVR only applicable to properties in within Auckland boundary

LVRs are all about  moderating bank behaviour more than consumer behaviour, keep that in mind when any talk of LVRs is mentioned

...as they now realise that the NZ economy is just that, a housing market with few cows tacked on.

Many of the people i talk to have rental properties,mainly just the 1 or 2.
None of them have invested into shares on the NZX and none of them want to.
So for them and many thousands like them rental property is it and who could blame them given their returns given the price boom and it's just not in Auckland.

You want to know why they aren't worried. They aren't worried because there won't be a single one of them that is struggling to house themselves, there's probably not a single one of them not benefitting from this mad market
Get the cashed up investors out before worrying about LVR, that won't bother them in the slightest.
The govt WILL have to get back in the business of getting lower income people owning their own homes again

Yes, in the absence of a CGT or a Tobin tax like stamp duty, this is a painless, frictionless way to 'enrichen' a whole lotta voters.
Except, of course, if you happen to rent or are an Aspiring First-Home Buyer.
Then it's perma-lock-out.
And under current conditions (let's give the ol' broken record another spin but warning-links are well rotted) of:

  • hideously constrained supply,
  • licenses and consents up the wazoo for everything new,
  • land-banking and rual-urban land price multiples off the chart - unearned CG's
  • a Cozy Materials Cartel in operation

why, then tipping real cheap $ into this mix is surely gonna have price consequences. 
All is proceeding as I have foreseen.

The object is to preserve existing wealth not generate new wealth. Existing wealthy must be protected whatever the cost
let the young leave the country  what ever it takes just prtect the wealth of the already wealthy

BH believe it or not but I actually agree - the RBNZ is far too relaxed about what is developing in Auckland.  While on balance I agree with their view that prices are already very high, which slows the rate of change in future prices (on the upside...), they ignore the risk that there is about to be a net influx of PLT immigration.  This influx isn't really an influx, rather less Kiwi's moving to Australia as NZ's economy comparatively improves and AU slides.  More heads = more beds.  As the population swells at a much quicker rate than the construction industry is able to increase the housing stock so to will house prices swell.  With interest rates low, a decent economy, and expected pick up in immigration - there is another 15% upside probably in the next year which is painfully dangerous for the economy and not maintainable in the medium term (as the construction industry booms - and it will boom - supply will widen and prices will drop).
The RBNZ ignores all this.

And the RBNZ are just lazy - there are plenty of tools to tackle housing affordability without having to increase the OCR.  Get on with it - just like the rest of the world.  Prices will always remain high in NZ - but we shouldn't allow them to get any higher.

Yes the RB is too relaxed in relation to house price inflation...but to be fair...it's not their job to make housing affordable, the RB's job is to contain headline inflation and overall stability of the financial system...it's the politicians who can provide solutions to housing affordability.

The RB has of course failed completely in controlling inflation. Inflation is a measure of the value of a currency ( not against other currencies) so if things cost twice as much that probably means that the money is worth half as much ie massive inflation. So House price inflation is inflation. It is actually one thing that allows us to have some clues about inflation. The cost of flat screen TVs actually tells us very little about inflation and a whole lot about manufacturing economies of scale, crazy real competition etc.

I agree, the government needs to come down hard on the banks with easy lending . 100% mortgages on low rates sounds similar to the US subprime. First time buyers should be set at 20% deposit regardless of whether you have a massive salary.If you slow down the first time buyers then eventually it has a knock on effect with rest of the market.  The Auckland housing market is starting to get a bit frothy.  If the wider population is sadled with lots of housing debt this means that it will take years for any economic growth in other parts of the economy as nobody will have any disposable income. Will will be a bit like cuba with old cars on the roads for years to come. Places in NZ countryside look much better value for money or small towns with less risk for downside potential. 

The housing bubble has come to stay and is essentially unstoppable.
Whatever the RBNZ says (but never do ) is pure spin. Anyway, it is beyond their powers to slow or stop this runaway bubble. We have all heard that John Key is not in favour of a lower housing cost to New zealand, so in what planet are people living to expect the RBNZ to be interested in lower housing cost ??
The housing/property bubble is not only in NZ but worldwide. This is the effect of QE in US, EU , Japan etc etc.  There is nothing the RBNZ can do to stop it. This has to run it's course and end in it's expected implosion sooner or later (with the Central Banks trying their best to make it "later" )
We only hope that the next time this bubble implodes in everybody's face the taxpayers will not have to foot the bill to save the banks again.
I just came back from a visit to Asia and the bubble is multiple times that of NZ. A CEO friend remarked that his property bought 5 years ago has tripled  in value. Even he is asthonished that "I make more money doing nothing, except buying a property than I ever made all my years as a CEO of a multmillion company"....

In the US, home of the last housing bubble implosion, Walmart is going into the house mortgage business.....this is a sure sign that the housing bubble is again growing in the Mother of financial disaster.....

I wonder if the RBNZ would hold the same views if it was based in Auckland with all its staff? Almost all the institutions it regulates (banks, insurance companies) are based there/here. This shift certainly changed (sharpened?) the outlook of the banks.
(Or should the banks be required to shift their headquarters to Wellington?)

Administer a dose of Reality?
Are you Nutz?

The RBNZ are (correctly IMHO) more concerned with excess credit growth - anything above nominal GDP growth should be ringing alarm bells. We're still below that - in the private sector anyway. New mortgage lending is exceeding pay downs by only about 2.5% so no need to panic at this stage.
The other thing is that the housing mania is largely an Auckland phenomena so no point in screwing the rest of the country with a more sane disposition. Here in the Bay of Islands section prices are around half the peak and dwellings down 25%+. Better lifestyle, harbour and climate - good time to exit the madhouse! 

I woke up this morning and my house has gone up another $500 bucks.  Sweet !

It is pretty clear that Wheeler is the far right Don Brash-type governor.  Whereas Bollard at least took tentative steps to curb in the housing excesses with capital adequacy controls etc, with Wheeler it seems to be all "free markets forever, regulation is bad, it looks good to the powerful & rich so must nothing to see here folks, move right along".  I guess you can take a message from who appointed him

I think central banks all sing from the same hymn book, same page even.
At least some people can see what is going on and act accordingly.
I feel for those that really don't realise that a financial system including credit/money is man made and can look and be anything we want. (Self interest is a large part of this design) Those that swallow all their personal banker tells them about wealth and saving.
Each and every interest payment must be added to the purchase price of a house for a real idea of what it cost. Rentals are like any business, you are looking for free cash flow. Freehold propery is great but too many are enriching banks thinking it is they who are benefitting.

I still cannot understand why house price inflation is excluded from the CPI.  From the consumers veiw point housing is a very real cost.  The single largest one, at about half of a lot of people's budgets.  Seems to me that this is just another example of the establishment rigging the economy in favour property investors.

@Chris-M... I agree. All growth is good growth mantra I think.
The world economy is a mess, by all measures. It's not because central bankers are stupid but I think because of self interest. Yet we hang on their every word.
Lend out credit created at no cost, compounding exponentially. Easy money.

We can all blame Don Brash for that little trick- he took them out of the measure.

Land was removed from CPI in 1999 because:
"Over time, land is not consumed and so can be considered to represent the investment component of home ownership. As investment expenses are outside the scope of the CPI the rebased CPI will exclude expenditure on sections." - Statistics NZ
Interesting how house values skyrocketed fairly soon after this change.
There seems to be a missing link somewhere in having land excluded. CPI measures the price of a basket of goods (fruit, veges etc.), which is then used to set interest rates, which then directly influences how much people will bid at an auction.

interesting how house values skyrocketed fairly soon after this change
Yah. While interesting, correlation is not necessarily causation.
Although it does seem remarkably dumb to the outsider that land does not get included in the CPI, for the RB being able to meet its inflation targets it makes it soooooo much easier to justify the 600K salaries and any bonues..
They can pick up their 600K salaries with a clean conscience coz they are meeting the inflation target....hehehehe  Great rort.
And of course, as land is not in any "core" inflation measure, it's easy for people to get sucked in to believing all is well in the world of inflation coz "core" inflation is "under control".  (The double quotes are deliberate as I personally believe that "core" inflation is a crock of excrement)

Part of the problem is the elites don't live in the same world as everyone else.

Yep, absolutely stupid that the CPI doesn't include housing...
Makes a mockery of the index.

What is inflation.....who knows. What is the value of a house....who knows. 
What I do know is that what worked for my father will be a disaster for me.

Hltler blamed the Jews and it worked. Housing is more complicated and those who understand it all are likeley to be high earners anyway. What's needed is an idea battering ram that a sufficiently large enough number of people can get behind.

@jh... I don't believe housing is complicated at all. Banks have been given license to create credit at essentially no cost and collect compounding interest forever. Prices are a reflection of what will be lent against it. Lots will be lent because the payoff is in the stream of interest payments to the creditor class. 
Credit can and will be created with no limit.

but the average person is easily confused by spin.

It's a good thing then that 93% of us are above average ;-)

Yeah that illusory superiority is really annoying - it detracts from those of us who are actually superior.

Hltler blamed the Jews and it worked

And.... there it is.

The job of the RB is to protect the value of our currency - for ourselves. It is beyond it to influence its value against other world currencies. It is also not the job of the RB to influence the price of Falt screen TVs. The job of the RB is protecting the purcahsing power of our currency. To do this they must work with Government. There are two ways in which the value of our currency can be changed- flooding the economy with money beyond that at which it can be absorbed is one of them. So if the government goes on a deficit spending spree- over paying for everying thing with money that it is printing ( that is deficit spending) then that would be inflationary- ie redusing the purcahsing power of every dollar we already have. Another way is to allow banks to borrow into exsitance a flood of money that reduces the value of every dollar we already have-But I  think it has already happened.