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.
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