By Bernard Hickey
You had to feel for Reserve Bank Governor Graeme Wheeler this week.
His high LVR speed limit came under sustained attack from all and sundry and, so far, he has little to show it's working to achieve what wants.
It is working on some levels. First home buyers are doubled over in pain, wheezing and hufffing about the body-blow the good Governor delivered on October 1.
This week's BNZ-REINZ survey of real estate agents showed first home buyers had simply gone from the market in November, leaving the way clear for cheaper houses to be snapped up by older rental property investors with more equity.
A net 78% of agents reported fewer first home buyers coming through the market, down 105 points from the longer term average of a net 27% seeing more first home buyers.
Meanwhile, a net 6% of agents were seeing more property investors in the market, albeit down from the long run average of 16% seeing more investors.
"First home buyers have been knocked out of the market. Investors have moved in and are looking to take advantage of vendors in distressed circumstances," said one agent. "First home buyers are non-existent in the market now," said another. "Investors and Chinese buyers (both resident and non-resident) have taken their place, but not buying on emotion like First Home Buyers do."
This survey came out a day after Deputy Governor Grant Spencer had used the survey's October results to argue the high LVR was not discriminating against first home buyers in favour of investors.
He said it was effecting everyone.
The central bank also reported this week that banks had significantly reduced high LVR lending and increased interest rates for this lending. But it acknowledged it was too early to say if the limit was actually working to slow house price inflation and reduce the risk that a housing bust could cause "significant financial system stress."
The bank thinks it will take three to six months to know if it's working.
But it has an awful lot of work to do.
Real Estate Institute figures out this week show annual house price inflation running at 10% nationally and 16% in Auckland.
When pushed this week by Labour MPs about what success would look like, Wheeler said he'd like house price inflation to get closer to Consumer Price Inflation, which is barely above 1% now and is targeted at 2% by the bank.
The obstacles for Wheeler are enormous.
Net migration is rising fast thanks to a surge of expats returning home and fewer locals leaving for Australia.
The inflationary effects on house prices are being amplified by the Government itself. Housing Minister Nick Smith bragged in Parliament on Thursday that Welcome Home Loans had doubled to a record high 47 per week since the Government lifted income and house price thresholds in response to the bank's speed limit.
But the biggest issue for Wheeler is the wall of freshly-minted cash sweeping around the globe on a hunt for hard assets, fleeing bank accounts where interest rates have been 0% for half a decade.
This is blowing up property bubbles from London to Auckland. Just this week the US Federal Reserve extended its money printing, Japan looks set to expand its massive money printing and the European Central Bank threatened to start printing.
Few are asking the question yet because the policy is only 6 weeks old, but what will Wheeler do if the high LVR policy fails to cut Auckland's inflation rate from 16% to 2%?
Will he be forced to put up interest rates just to burst the property bubble, even if consumer price inflation is still within the bank's target?
Wheeler wouldn't answer that question this week, but his Deputy Grant Spencer tried. He said the bank might try to "lean against" the bubble, rather than burst it.
We all 'leaned with Dean' in San Francisco. We may find ourselves having to 'lean with Graeme' in the years to come.
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A version of this article was also published in the Herald on Sunday. It is used here with permission.
51 Comments
About the only country in the world who raised interest rates recently is India: last month against an inflation rate/CPI of 10%, weakening currency & far worse problems than NZ.
How does the RBNZ raise rates on a generally weak economy?
If Auckland property prices are booming on foreign money - then how will raising NZ interest rates help?
Now the banks can't lend on NZ FHBs they are now more aggressively marketing to existing home-owners who have 20% equity or more & entice them to swap banks. So home-owners & investors with reasonable equity can expect lower/sharper rates as the competition heats up.
The RBNZ could hike to 5% but it's not going to stop Auckland house prices. Meanwhile provincial areas will suffer.
About the only country in the world who raised interest rates recently is India: last month against an inflation rate/CPI of 10%, weakening currency & far worse problems than NZ.
Not quite true:
Bank Indonesia unexpectedly hiked interest rates at a policy meeting on Tuesday as the Southeast Asian nation struggles to get its current account deficit under control and stabilize its rupiah curency.
Indonesia has been coping with a worsening current account deficit this year. In the second quarter, the deficit widened to 4.4 percent of GDP at $9.8 billion. While the number dropped to $8.4 billion in the third quarter, the deficit remains a problem the central bank needs to rein in. Read more
Isn't our own in need of repair as well? Read more
Wheeler wouldn't answer that question this week, but his Deputy Grant Spencer tried. He said the bank might try to "lean against" the bubble, rather than burst it.
I've read enuf books ...and I've lived long enuf to have witnessed some bubbles.
It is clear to me that Central banks are very much a part of the cause.
Excessive credit is the fuel that drives a bubble...
It is far...far...far to late to wait until a bubble is in full flight.... and then to "lean on it"... ( what ever that means).
Our Reserve Bank could have advocated for stronger financial " borders" for NZ... To help isolate NZ from the hugely excessive Global liquidity ... that has no end in sight.
At the moment I'm learning about the nature of Chinas Land tenure system.
Think of China with its Leasehold land Tenure system... One can safely predict that Private sector Chinese foreign investment in Western Real Estate with free hold title will accelerate.
http://www.chinadaily.com.cn/business/2013-11/14/content_17106110.htm
$5billion could easily turn into $20 billion...
The more I read about things .. in a Global context... the more I think that NZ will end up with a 2 tier Real Estate mkt...
Auckland is a Global City that will feel the full force of Global credit blown Bubbles... and that will spill into the rest of nZ...
I wouldn't want to be in Graeme Wheelers job.... It might needs some radical "paradigm shifts"... with some big changes in Monetary policy... that addresses structural flaws of the Global monetary system... that addresses the unintended consequences of what we call.. "Globalization and free trade" ( The idea of Comparative advantage has 2nd and 3rd degree effects which are not so.. win-win )
Check out this video.. 53 min mark.... Talks about how much credit that China created after the GFC.... it is freakyyyyyy.... It like Monopolyland money...
http://www.youtube.com/watch?v=ZP8AjMAdql4&list=PLtbNXv8-QR53ZcyWuByXpA7HHtPc-J3hT&index=20
I agree with Bernard... Our Reserve Bank will find that the going is tough and it is going to get tougher.
Our Reserve Bank will find that the going is tough and it is going to get tougher.
Yep, a whole lot harder since the neighbourly Reserve Bank of Australia will provide A$300 billion to help Australian banks meet their liquidity requirements under Basel III through a centrally-managed committed liquidity facility (CLF) Read more
And on the real estate front it just gets more liquid by the minute.
While the large increase in Australian banks’ self-securitisation of residential mortgage-backed securities (RMBS) started in 2008 (i.e. before Basel III was developed), the amount of self-securitisation is expected to stay high going forward as these securities are eligible as collateral for the Reserve Bank of Australia’s Committed Liquidity Facility (CLF). Indeed some banks are gearing up already for the CLF. Given the low level of government debt in Australia, the Australian prudential regulator has adopted elements of the Basel rules that allow banks to count a committed liquidity facility provided by the central banks as part of their Basel III liquidity requirements. Read more
so the difference between a bubble and major growth area.......?
While I don't agree with LVR, it's still extremely early days. As mentioned elsewhere there are still pre-apps and fixed contracts, and purchase lifecycle effects.
Yanking the pot off every few seconds to see if it's boiled yet, is not going to help - let alone rushing about like a manic address disorder child on three cans of energy drink....
On thing that FX has really pointed out to me - responding to trends .... before there's even a trend... is going to produce "less than optimum" outcomes. Every. Single. Time. (so try not to make a profession & policy out of it people.)
It is hardly surprising that first time buyers are being shut out. It was the only logical out come. If the Reserve Bank wanted some other outcome they should have tailored their actions to directly target their objectives. i.e.
Raise the LVR ratio on investment properties to 60% or higher
Lower the LVR ratio from 60% to 25% for property investors building new homes
Lower the LVR ratio from 20% to 10% for first home buyers building new homes
Raise the LVR ratio from 20% to 30% for non first home buyers, or 15% if it is a brand new home.
Outside the the realm of the Reserve Bank, but sales to foreigners should be stopped completely and those properties already owned oversea should be taxed 2-3% of the capital value per year.
We are really just pussy footing arround and do not appear to want to seriously address the problem.
There is an additional option available
Some years ago, banks in Australia offered two type of property mortgages
(a) Personal Residential Mortgages
(b) Investment Property Mortgages
Not sure if they still make that distinction
Interest rates on "Investment Property Mortgages" were substantially higher than Personal Residential Mortgages
Could and should be done in NZ. The time is now.
Stephen Hulme at 11:19
Well it sems like the banks are saying -- once we have distributed YOUR fiat-multiplied credit based on the first "real money " deposits to our customers, we will come back to you with proof of the mortgaes and ask you to give a similar amount of credit again. Ad infinitum without impacting Basel capital adequacy requiremnts.
Do you know if RBNZ allows the same ? Seems to be officially sanctioned in Oz. Can you help me understand what might be the justification for this please.
It almost seems like a loophole that needs to be plugged rather than be allowed by Central Banks.
Do you know if RBNZ allows the same ?
Yes, but an offsetting liquidity sterilising RB Bill facility was put in place. Read more Historical actions can viewed in the spread sheets accessible here.
Justification is in short supply, but has been observed thus:
It is paramount for a central bank to recognize Bubble Dynamics early before they foment major financial excess – before they inflict deep impairment upon economic structures – before they gain powerful constituencies (as monetary inflations invariably do). And I strongly believe this key regulatory role became wholly impractical when market-based Credit (as opposed to traditional bank lending) assumed such a prevailing role in Credit systems and economies (at home and then abroad).
Indeed, what commenced during the Greenspan era only accelerated throughout Bernanke’s chairmanship: Progressively, Federal Reserve policymaking directly targeted the securities markets and asset inflation as its prevailing monetary policy transmission mechanism. And here we are today, with top Fed officials having stated that the Fed is prepared to “push back” against a “tightening of financial conditions” with even larger quantities of QE. The harsh reality is that Bubble markets will eventually burst with a problematic tightening of “financial conditions” commensurate with the excesses of the preceding boom. And there is simply no precedent for a global securities Bubble fueled by Trillions of central bank liquidity and bolstered by promises of ongoing liquidity backstops. And the greater the Bubble, the tighter the noose becomes around the necks of the markets’ central banker hostages.
From Dr. Yellen’s prepared remarks to the Senate Banking Committee: “A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”
The new chairperson’s hopeful view is detached from reality. In a critical upshot of years of flawed policymaking, central bank liquidity these days greatly prefers Bubble securities markets to real economies. Having now fueled a full-fledged global securities market Bubble, there will be no “returning to a more normal approach to monetary policy.” It’s a myth in the same vein as the Fed’s 2011 “exit strategy.” It’s now a matter of how long until this “how crazy do things get” market phase runs its fateful course. Read more
Thank you for the links.
So reading the notes:
***The Reserve Bank assumes these (Residential mortgage backed securities-RMBS) are not traded in the secondary market and no market price is available
So only a buyer of last resort , noting that the TAF facility was set up in 2008 and the height of the GFC. Banks probably still find gullible suckers 6 years on now now despite lessons of GFC.
The Reserve Bank will be willing to accept exposure on Residential Mortgage Backed Securities up to 2% of gross assets and on Bank Bills up to 2% of gross assets (as per the latest set of audited accounts) per institution at OCR + 50 basis points
So limiting RMBS exposure to 2% of banks' assets plus a haircut of OCR+0.5% . Presume safe to assume that Residential mortgages are a darn sight more than 2% of any bank's assets.
The Reserve Bank reserves the right to apply a further margin of 5% if there is no market price, reasonable method of estimating the market price or poor liquidity. This margin of 5% does not apply to single name RMBS.
More protections for 2-name based RMBS's (i.e. more fiddly-to-recover mortgages, and presume none for multi owner mortages)
Add on top of all that - sterilisation.
In NZ then, it does not seem so bad as made out in Zero Hedge.
Concur?
In NZ then, it does not seem so bad as made out in Zero Hedge.
Concur?
I have little to concur with - Zero Hedge relied upon the outpourings of the FSB where NZ did not feature and we are not part of G20 hence not indulging in this liquidity exercise. How you interpret their subsequent comments depends on your own methods of filtering financial information .
I will say that under the regs our local banks can create RMBS up to 4% of their assets and substitute covered bonds if they so choose. So in affect the best maintained assets including covered bonds can account for ~12%- 14% of bank assets beyond unsecured creditors reach in the event insolvency is declared. Add in the fact that foreign wholesale loans amounting to ~32% of total borrowings are excluded (not pre-positioned under OBR) then we have a situation where unsecured bank creditors are carrying a heavy load for not much reward.
"Cowboy … The Reserve Bank’s primary role is to protect the financial system. We don’t want to see a repeat of Ireland (there are numerous other examples) here … refer How planning exacerbated Ireland’s housing bust | | MacroBusiness"
Yes that is supposed to be their role. as well as protecting the government and their own jobs.
And you're starting to hit the reason for the investment on the head. People AREN'T investing in "houses" or "property" they're investing in that protection process, they're investing in the asset that gives value - that the people in power, the government and RBNZ (re:financial sector) will act in a certain way.
Houses come and go, Houses cost, you have to have icky tenants and sh..stuff.
What you can invest in - is the those in power RBNZ are going to protect the financial system.
What's the correct income ratio on that investment Hugh??
Fully agree Cowboy............people are investing where the protection mechanisms are. It would be silly to not do so.
Any area of an economy that has protection built in is the place to invest. Protection assists in removing risk and behaves like a subsidy pushing prices higher.
The RBNZ's role to protect the financial system has winners and losers. The OBR policy is just another protection on debt.
Interferring in a free market always has a risk side and a reward side.
If the Government and the bureaucrats wanted affordable housing it could have been achieved easily and effortlessly. But the effect of affordable housing (if you applied Hugh's ratio's) could cause significant damage to the Financial system as it would be deflationary.
Hugh knows the market is distorted by restrictions on land supply and the horrendous Council costs and his affordability ratios can provide a reasonable formula for working out the margin (difference between cost and sellling prices) of these restrictive distortions.
" significant damage to the Financial system as it would be deflationary."
:) once you've taken the drugs and become addicted that is the normal course of events. Just ask people who bought asset-backed collective units :)
Keep taking the drug isn't the answer.
Things like LVR and other market interference mechanisms are like methadone - they causing nausea and vomiting, and frequently are worse and more addictive to their players than the original drug.
What Hugh is ignoring is that there are two parts to the investment.
A home: which 3 is good multiplier.
And a "goodwill" intangible investment based on government and financial malarkey ( :) ) which has no ceiling, and while inherently more risky has much higher return and predictability.
Hugh, the property stats coming out of China recently are nothing short of mind blowing. They have taken little more than a decade to accumulate a property market worth some $15 trillion. The US took literally hundreds of years to achieve the same and when looking at those multiples you've supplied it simply maginifies the situation. Add to that $3.6 trillion they've invested abroad and yes we need to rebalance in NZ before something gives in China.
This article here states $18.8 trillion but whether data out of China is accurate or not is anyone's guess.
http://www.bloomberg.com/news/2013-09-15/no-confidence-in-china-markets-inflates-housing-bubble.html
This article has a very good interactive chart comparing values from country to country. Scary stuff as far as NZ is concerned.
Wheeler is doing an appaling job taking on free market forces .
He is farting against thunder by thinking he can influence the only truly free market in New Zealand..
If he thinks there is a bubble , he clearly would not know one if it popped under his nose .
There is a known net housing shortage in Auckland of 39,000 houses and a land shortage created by the arbitrary ring around Auckland, which ensures supply is constrained for the forseeable future .
Simply , there is no bubble , and the prices of property are driven by demand for housing, new migrants , and cheap money .
Nothing has been done to alleviate the supplly side of the equation which is in crisis
It should be borne in mind that his actions are primarily to protect the Banking sector from the consequences of a bubble that simply is not there .
A bubble would be defined as a price above the long term run, thats set and has been proven to be a good guide of 3 to 1. Ive yet to see anything that indicates that this is no longer the case. Further the very fact you say we have a constrained supply and a crisis yet then say no bubble makes no sense.
regards
A shortage of supply is not the correct term. What the urban limit creates is inelastic supply. A much steeper supply curve. Those few landbanking green field and old money brownfield owners within the limit know they have no competition from down the road so can drip feed a few sections at a time at excessive prices with no fear of competition from elsewhere.
Why do we give them this monopoly pricing power? It is isn't free market competition and it isn't reducing inequalities socialism. Yet neither side of the political spectrum is doing anything about it.
Also many greensite developers like to put conditions on the sale. certain flash housing, for example, that improves the value of the rest of the property. Or, as I have seen, contractual obligations to buy a house through the same landbanker, resulting in overpaying for land, flash house, and premium price on house.
Thing is - do you rort the landbankers' investment? At what point does a person no longer get to make decisions about their own property (or is it about political sway) ?
The whole point on investment is that it gives the owner a financial strategic and tactical advantage. Demand and shortage goes hand in hand - why should third parties get to over thrown the system just because they don't want to pay the actual market place, and would rather resort to legalised mugging.
At what point do we rip away the first-world mask, and prove that we're really just doing third-world socialism
If we put in place legislation to stop loan sharking, really I see no difference to that of landbankers. It would win far more votes than it loses.
Besides which a rural piece of land has a rural price, so really all a Govn has to do is buy it a fair rural price, change the use and sell it, sub-divided. The Landbanker still makes money just not the huge margin expected.
Sweden has a socialism, hardly 3rd world. If its your defination, well no problem, take the mask off, the rampant capitalism, cronyism and explotation doesnt make we want to live in any "first world" you define.
regards
physical there is "inner farmland" and "outer farmland". <- supply
create an urban boundary.
legally there is now only "inner farmland" <- hardened supply.
Those who own the limited supply can wait until people are willing to overbid their perseption of the lands value (ie buy in a sellers' market). Knowing (1) that inner farmland is a fixed supply, and Holding will increase the value of the available shrinking supply. and (2) that the legal force that shapes the market isn't able to be overcome be any form of human ingenuity or decency, thus their market & investment is well and truly protected. and thus (3) it's only going to get better.
I will certainly not pay these utterly dumb prices for a home , but I do not beleive this is a bubble .
Why would any investor buy a property and get a yield close to zero unless he recognised that there both a housing shortage and an artificial land shortage, and an ever increasing pool of migrants requiring somewhere to live?
These is a real shortage of housing , a constrained land supply ( albeit artificiial ) more migrants coming in than we can handle , and very cheap money .
The only time we will get a reality check on house prices is when we slow down the migrant tsunmai to a trickle , release more land for Auckland to grow , and give savers a real decent return on thier savings
agreed. Bubbles happen when there's oversupply situation, or value (eg markets, employment, buyers*) vanishes.
* eg radioactivity
Since the supply issue isn't going to be effectively addressed in viable timeframe. Consents and skilled worker availablity will see to that (until they allow in hoards of migrant tradies, like they did for the Turangi electrical damns.
And demand isn't likely to be remedied :D despite my clever recommendations.
It's just a really hard market.
nope, over-supply.
undersupply creates rising prices, a "gold-rush" effect creates bubble_like_ situation, but as long as there's no oversupply value holds up. IF demand quarters overnight (eg the rush on goats or kiwifruit) then suddenly those "Great investments" are paper earnings, and the bubble collapses.
Without that oversupply effect, the bubble can't pop. And bubbles that don't pop aren't actually bubbles, as that's the definitive behaviour that makes it a bubble.
I think we can disagree here. Id take a bubble as a price over "fair value" which is about the magic 3 to 1 to earnings, we have 6 to 1. Plus there seems to be considerable speculation via cheap money that can vanish quickly. On top of that yoy rises markedly above inflation....
For me that defines a bubble.
Further you are ignoring at least 2 effects that will pop it,
1) Rising interest rates, unaffordability.
or worst of all,
2) Recession / depression, job losses, fear.
Well we get to watch and see how it pans out.
regards
Everyone always love cracking out supply and demand and explaining how there is a shortage in houses so property prices can't be over priced. But as Steven says level of debt or more importantly supply of debt is the key driver to price. By now hopefully everyone understands that debt is just a call on future resources yet to be taken out of the ground. Once a critical mass of people realise we are all writing cheques the earth can't cash the supply of debt will be corrected and property prices will drop.
Or of course I am wrong and debt can grow for ever and so can the earths resources...
While I'll agree on 3 to 1 in that Ive seen nothing of note to say it no longer applies. All for some evidence to be put forward....and no guys n' gals, "it hasnt happened yet" isnt evidence.
I dont agree on the political impediments (being the only factor). You simply ignore other factors, as per normal, such as rampmant speculation with cheap money. It seems that "you cant lose on houses" however just about any other asset seems to be behaving that same way.
So what you want to do is really build like crazy to meet a non-existant real demand. The prolem I have with that is the hangover that will come. Now if that pain was on the stupid ppl who gambled, no problem, trouble is there will be the expectation that inocents ie the tax payer bail them out aka ireland.
That I object to.
regards
If we keep the UK style green belts resulting from 1947 Town and Country Planning ACT then we will get similiar results. See the graphs here.
There will be booms and busts. But the busts will not return the price to the pre-boom point. You will getting a general rising saw-tooth trend.
Wheelers conundrum is in this simple analogy :
Low interest rates are the 'fuel' in Bernards Article , the accelerator pedal , if you like .
Wheeler now wants to slow down and he chooses use the brakes , but instead of taking his foot off the cheap money accelerator he has kept the cheap money pedal to the floor , and he is touching the brake pedal , albeit lightly .
The net effect is a mild impercepatable slowdown........ and the possibility of worn out brake shoes, or worse .
Either way you see it , if he carries on , it is not going to end well
Wheeler cant control the cheap foreign money pouring in though, so in effect the accelerator isnt his to control. What he can control is the emotive FHB taking on ever increasing debt that will impact NZ as they try to compete and be left in the game when the foreign money runs.
If you read up on Steve Keen, a LVR limit isnt a known step function. It also appears to be quite leveraged in its effect, ie a small change causes a big domino effect in time. So if you try and get a big effect really quickly then the domino effect would be catastrophic in size.
Hence, yes a "light tap" could be more than enough. rather than brake shoes, think of it as deisel compression braking....no wear, no cost...just a bit of noise.
regards
@SK you may well ask about WTF is the Goat Bubble , but it actually happened right here in Godzone .
At the time I remember thinking WTF , the story doing the rounds was something like this :
Angorra goats became the rage a few years ago , a wooly looking quite ugly specis of goat , who we were told had fur that could line the inside of a spaceship and heat protect the occupants when re-entering the earths atmosphere .
Sounded like something from Star Wars , and I did not buy it as it appeared like a load of codswallop .
It makes me wonder about my fellow countrymen , and how easily they are duped into investing in hare -brained schemes- get- rich- quick schemes .
Look at :
- Finance Companies
- Angorra Goats
- Online Scams
- Equitcorp
- Dotcom shares
- Biotech shares
- Alluvial Gold Mines in the Solomon Islands
- Scratch card scams
- Nigerian mail scams
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