By Bernard Hickey
It's come to be known in banking circles as the 'bifurcation' of the mortgage market.
It describes the new way that banks are dealing with home buyers after the imposition by the Reserve Bank of its high Loan to Value Ratio (LVR) speed limit from October 1.
The market has been split into two.
On the one side is high LVR borrowers who want to borrow more than 80% of the value of the property. More often than not they are first home buyers, particularly in Auckland.
Banks have mostly stopped new lending to first home buyers because the banks know that if they don't, they could go over the bank's speed limit and risk breaching their banking license conditions.
Banks have increased their interest rates for over 80% borrowers and toughened their lending criteria to exclude those on lower and less stable incomes.
On the other side of the market, banks love home buyers who want borrow less than 80% of the value of the house. All the major banks have ramped up their marketing activity to this side of the market, offering special discounts on fixed mortgages and other freebies such as televisions and iPads.
One bank, BNZ, has even offered them a credit card with an interest rate set permanently at the same level as its standard floating mortgage rate, currently 5.99%.
BNZ's 'HomeAdvantage' MasterCard also has no fees and earns Flybuys points. Normally this card would charge 19.95%.
Banks are ramping up their lending to this sub-80% side of the market for two reasons.
It is unrestricted and banks make more profits by lending more so any way they can grow lending is good for their profits.
Secondly, increasing the sub-80% category of lending gives them a bit more room to do some more above 80% lending once they've cleared their backlogs of pre-October 1 pre-approvals.
The Reserve Bank's high LVR speed limit is structured as a limit of 10% of all new mortgage 'flow', which means the more sub-80% lending a bank can do, the more above 80% lending it can do.
Rental property investors are in a much stronger position to join the favoured sub-80% category. They are often 'watering down' the equity in a house or houses they already own to buy more rental properties.
So instead of 'withdrawing' the 10% equity from an existing home to leverage it up to buy another home with a 90% loan, now the rental property investor just pulls out 20% and borrows the remaining 80%.
A first home buyer doesn't have that luxury of simply drawing down on more equity from an existing home. Such a buyer simply has to wait and save up more, or ask for gifts or loans from parents and others.
This week the Reserve Bank released the first figures showing the impact of the high LVR policy on this now bifurcated market.
As expected by the Reserve Bank, high LVR lending almost halved between September and November and now sits just above the 10% speed limit it set for the first six months.
Banks moved remarkably fast to get there, indicating they have virtually stopped all new lending while they work through pre-approvals.
High LVR lending fell NZ$566 million to NZ$571 million. But sub-80% lending rose by NZ$739 million to NZ$3.899 billion over the same period. See full story here.
This meant sub-80% lending to rental property investors and those lucky first home buyers with big deposits has more than offset the drop in high LVR lending.
Economists say this will soften the impact on house price inflation.
Also this week, the Master Builders Federation reported a 27% drop in inquiries for new homes because of the LVR limit as first home buyers pulled out and those already owning homes had to cancel because their 'chains' had been broken by first home buyers pulling out.
New building consents actually fell 0.6% in October, despite all the talk of housing shortages and the Auckland Accord.
It's early days, but the high LVR policy is struggling to contain house price inflation or lending growth.
It may also restrict the increase in new house building needed to control house price inflation.
It has, however, cleared first home buyers from the market and made it easier and cheaper for rental property investors to borrow less than 80% of the value of a home without competition from first home buyers.
It also appears to have delivered a de-facto easing of monetary policy at a time economists say economic growth is accelerating towards 5%.
So what was the point of all that again?
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This is an expanded version of a column first published in the Herald on Sunday. It is here with permission.
44 Comments
"Interest rate increases next year is not necessary and is wealth damaging."
How is it wealth damaging..?? As far as I know , it is simply a "wealth transfer"... from savers to borrowers... there is no net change in wealth.
How do high interest rates strip NZ of wealth...???? ( Keep in mind that most Bank funding from offshore is wholesale and might not have much to do with domestic interest rates in NZ )
How do u figure that low interest rates is increasing the wealth of NZ..??? All I see is that we are borrowing more...and that our current acct deficit is largely the result of invisibles ( ie. foreign investors repatriating income )
All I can see is that low interest rates results in more borrowing..... which gets capitalized into rising asset prices. ( is that what u mean by wealth creation..?? )
You often use Singapore as an example.... But Singapore is a very, very different Country to NZ.. It has a high savings rate and all Land is owned by the State and it also has a very strong current acct surplus.... so I'm not sure if Singapore has shown us any kind of path.
-ve real interest rates is a form of theft in my view... The sector of society that probably are the "rentiers".. are the elderly and retired and they are the last people we should steal from.
Roelof, sorry but you are tottaly wrong.
Help i'm being robbed because i only get 3% on my savings and i should be getting 6%.
Help i'm being robbed because i only get 6% on my savings and i should be getting 10%.
Help i'm being robbed because i only get 10% on my savings and i should be getting 12%.
And so on.
Who decide's what a fair rate is.
You put up interest rates and the value of shares fall - Help i'm being robbed by savers
Some people just cannot be satisfied
Roelof. You are on the right track.
Most, certainly, one prolific poster here in particular who is not a born-and-bred kiwi keeps bleating for, no demanding, lower interest rates, without ever considering the consequences or examining the alternate case.
What should be examined is the case for higher interest rates.
The mature and the elderly who by-and-large were once-upon a time savers, are now reliant on the interest on their savings to live on. They largely spend and consume that income which translates into job-support and job-creation for the younger members of society, through their consumption.
Interest rates paid on savings have been reduced significantly resulting in lower national consumption, lower retail sales etc etc etc
Whereas a reduction in interest rates charged to borrowers is not consumed, but will be applied to either an increased mortgage repayment, ie principal reduction of borrowings, or capital repayment to the banks who do not consume, or an increase the price they are able to or willing to pay in purchase of a property, which is a capital outlay, again no consumption, or job-creation
So, the proposition is put forward that a reduction in interests rates depresses consumption and jobs, while inflating the price of a fixed quantity of capital-assets in the form of housing stock
two otherguys
I for one don't have much sympathy for te lderly of today when they would have been te beneficiaries of government intervention in the financial system and markets during the 1970s to keep interest rates and to keep interest rates and prices low and the recipients of government assistance to buy their own homes without which it likely wouldn't have been possible if it were left entirely to the market. They've gained considerably from the capital gains which have accrued to homeowners as a result of the liberalization of financial markets, house market volatility and local government policy which have deterred house construction. Sure the gains haven't been spread evenly, but this is capitalism, one shouldn't expect them too. Its a system that transfers wealth from the clueless to the smart. Its not a contest that rewards the upstanding. Survival of the fittest. Devil take the hindmost.
Everyone wants a handout but no one wants to pay the bill when it comees due. It always someone else who's having a free lunch, not me!
A somewhat lop-sided, one-sided, prejudicial point of view
You speak as though ALL of todays elderly were yesterdays beneficiaries - not so
In the 1970's there were LVR's of 70% with outgoings limited to 30% of your take home pay, and those limitations werent legislated, they were self-imposed by the lending institutions. You had to have a 30% deposit.
and, (for all those non-kiwi among you who wouldn't know) here in new zealand
All the government assistance and hand-outs were means-tested.
Why didnt you mention that?
I'm saying they weren't above taking advantage of government largess and poor government policy which they were the beneficiaries, so why shoud the expect high returns on their saved capital which they've gained via those poor policies?
We kiwis are a stupid lot. We've traded the low work hour, generous social system, high wage economic regime enjoyed by Europeans in favour of the one of the highest number of hours worked per capita in the world, low GDP per capita, one of the world's highest capital cost, and the dubious priviledge of selling each other overpriced housing which arguably is the resson we're also one of the most economically unequal in the work. Well its not all bad, we can buy cheap electronic goods from China and young people can cheaply leave to country's where they can be payed enough to afford to pay off their student debts.
I'm saying they weren't above taking advantage of government largess and poor government policy of which they were the beneficiaries, so why shoud the expect high returns on their saved capital which they've gained via those poor policies?
We kiwis are a stupid lot. We've traded the low work hour, generous social system, high wage economic regime enjoyed by Europeans in favour of the one of the highest number of hours worked per capita in the world, low GDP per capita, one of the world's highest capital cost, and the dubious priviledge of selling each other overpriced housing which arguably is the resson we're also one of the most economically unequal in the work. Well its not all bad, we can buy cheap electronic goods from China and young people can cheaply leave to country's where they can be payed enough to afford to pay off their student debts.
I specifically said the gains weren't evenly spread. I was saying arguably many who were able buy homes and thereby have been able to profit from those historic capital gains wouldnt qualify for a mortgage in today's marke economy. People in similar circumstances such as myself don't have recourse to that assistance and thereby have little chance of owning our own home.We're paying off someone else's mortgage and any increase in interest will be passed onto us. Why should I be responsibility for someone else's income when they're likely better off than me? Zanyzane arguably has less cause to complain about high interest rates though. Peraps he should sell one of his rentals and invest it in a bank savings account or better yet in productive enterprise.
Roelof, people don't borrow because of low interest rates, but because of expectation of rising incomes and capital gains. People were still borrowing like crazy even when the OCR peaked at 8.5% and only stopped when the finance companies collapsed when the banks withdrew funding because the world' credit markes locked up and they no longer had access to the wholesale money markets.
What makes you think the banks are stable? They are the most highly leveraged businesses in our society and enjoy an exorbitant privilege and protection from the state. The Aussie banks were sheltered from the last storm by the Aussie government which was effectively rescued by the Chinese government flooding the Chinese system with newly made dosh to keep the Chinese building boom going. Can that be repeated? No one knows.
The RBNZ has to work very slowly to tame these behemoths, it cannot come out and say "The banks might be dodgy". So far it has pledged all the banks' equity to foreign lenders leaving none left to back NZ depositors. Or it might have, no one knows. The trouble with a complex system is no one can know.
There are whole bunch of things you can do to make banks more stable, but introducing them causes shockwaves through the system that might be unexpected:
Restrict loans to less than 100% of deposits (currently 140% I think)
Match loan duration to deposit duration (currently 75% of loans due in next year are matched which is better than it was but is still unbelievably fragile)
Have a realistic equity buffer. If 10% is too low for house buyers then it is too low for banks too. 20% to 30% sounds more realistic to me, but even then who would buy any other business at that level of leverage?
Stop all derivative gambling by treating them as the debts which they are. The nonsense in this area is extraordinary, the assumption is that all derivative debts will be paid, this only applies in the good times folks. If the banks have upwards of $500 billion gross derivative debt each there needs to be a realistic equity buffer for when the chain of payments breaks. These are just debts under a different name. Again, if 10% is too low for household lending then it is too low for derivative lending and borrowing.
The banking system is fragile, not stable at all.
The RB is finally moving to including House Prices in its inflation measure- indirectly at this point but still they are moving in the right direction. For many years the RB has told us that inflation is low because wages in China are low and the stuff from China got cheaper and cheaper therefore they have tamed inflation. Meanwhile back home in old NZ actual inflation has gone through the roof, Inflation is important to the RB rather than the association of Falt Screen TV importers because the inflation measurement is the way we keep tabs on the store of value component of our currency- in this job of course the RB has been a failure.
Interest rates kept artificially low are a way of punishing savers and rewarding speculation, low interest rates mean high asset prices- pretty much everywhere and most times this is the case.
Most NZ debt is not really supplied from offshore at all, it is typed into existence when you take out the loan and promse to make the interest payments.
NZders don't 'save' as such because interest rates are so low it is not worth their while- as above, low interest rates also mean high asset prices- so why save when it is better to speculate on a seemingly one way bet of asset price rises.
Meanwhile our dollar is worth less and less.
Totally dont agree with you here.
So you dont care if we see way higher un-employment and businesses going bust? That taxes will have to rise and services get cut as the Govn's income collapses from the above? because asking for house prices to be in inflation is the end effect.
Inflation is no where, 1.4%....thats not through the roof, 14% is through the roof. On top of that its in real danger of falling back to <1% and worse.
The reason we are in such a pickle is excessive debt, no fix for the banksters and increasing energy costs which it looks now like its taken us to the point of collapse into a severe recession if not a full blown depression. Low interest rates are the symptom not the cause and not much of a cure.
Yes I agree there is mad speculating on houses but that isnt true inflation, its more like the seasonal impact in CPI, when the "autumn" comes house prices will collapse.
Low interest rates, well have a look at say Japan where you dont get much interest at all. So really getting significant interest here in the western world for little effort at no risk is plain crazy. Saving as interest rates are low is crazy and unjustified. Just look at Japan and china say where I think the savings rate is something like 25% of their wages and they get 0.5~1% so your idea is absolute bull.
Our Dollar is at a high rate as ppl speculate, sure. Problem is like chemotherapy for serious cancer all it buys is a bit of time......it should be cut out but no one (us or pollies) wants the pain or risk from that.
Comes back full circle to us the voter voting for the awful pollies we have and we are stupid enough to believe in jam today and jam tomorrow, let the kids pay next week.
regards
I agree with Zany.
The RBNZ's move was primarily to reduce risk to the banks. This is on it's way to acheiving that.
The fact that landlords are being advantaged over First Home buyers is not an "unintended" consequence. It was plainly obvious to all, espc the RBNZ.
The next move is up to the Government.
If they want to make more of the now reduced number of high LVRs available to FHBs; they can change the rules around how much interest landlords can use as a tax decuction.
Makes landlords less likely to leverage heavily which is not being done out of neccesity, but mainly for tax reasons.
I believe the RBNZ should and will amend the high LVR rules to exempt new builds.
Hopefully interest rates will increase next year and start to reward savers who have been disadvantaged by low rates forced on them by reckless borrowers.
Probably only a 25 point rise in March, instead of the 50 point rise that would have happenned without the LVRs.
As to the superannuation question.
Not enough people are contributing to Kiwisaver, and of these not all have employer contributions to make any noticeable effect.
A proactive OCR rise is needed to keep inflation under control next year.
Meddling with tax deductions will discourage investors from providing rental accommodation in the first place, creating a shortage and thereby push up rents even further in an efffort to recover costs.
Likewise rising interest rates may reward savers but rising mortgage rates will feed straight into rents.
There are hundred of thousands of private rentals in NZ.
Guess who will have to pick up the tab if loopy ideas like spottie's were introduced?
Yep you guessed it - spottie and all his mates by way of more taxes.
Rents are dependant on income.
If interest rates go up, and/or tax rules change then some rents may increase but only if the tenant can afford to pay.
Some rents will not be affected.
IE: No or modest mortgage.
Some landords may sell 3 or 4 of their 10 rentals as their net yields reduce.
Thereby increasing supply to FHBs.
This would be a good thing.
Some landlords with multiple properties, and property advisors, can see the writing on the wall and are desparately trying to "talk up their book"
Others will just have to rely on their tax free capital gain and put up with low yields.
ZZ, sorry but thats laughable if my (in the past) and my friends and work mates experiences are anything to go by. Sure maybe there is the odd landlord maybe, but really most seem to expect to put the rate up every year. Gambling it seems that the extra asked for is less than the cost to move for the tenant.
regards
Probably not:
If recent history is anything to go by, the 2014 general election result has already been decided. As the chart to the right shows, since 1998 the party leading the opinion polls in July of the year preceding the election has gone on to win the highest proportion of the party vote, enabling them to form a government.
Despite the current centre-left Labour/Greens bloc looking competitive, history tells us National should have the 2014 election in the bag, again.
Although David Cunliffe emerged from the Labour leadership 'primary' with all guns blazing, recent political history also suggests he will find it hard to make a sustained impact within the next 12 months. The MMP era is littered with major party leaders who have rolled their predecessors with the hope of doing better within two to three years of the next election, only to fall by the way.
John Key was the exception as leader of the Opposition for just under two years before he became Prime Minister; before that Helen Clark was leader of the Opposition for six years, and before that Jim Bolger was leader of the Opposition for 4.5 years. No one has yet gone on to lead a government within 12 months of assuming party leadership.
Hi,
URL,
http://www.nzherald.co.nz/future-of-nz-celebrating-the-new-zealand-hera…
?
Some useful bits but a lot of it looks like wishful thinking, opinion.
"Some 62.7 per cent of National voters make their voting decisions before the election campaign; 40.4 per cent of them make that decision before election year."
and look at how National has polled in the last 2 years....way lower.
Beyond that argument, consider the 2 aspects risk and impact.
By all means gamble, its to my advantage if PIs dont panic and sell up.
Bear in mind that things change, looking at such a shallow piece of history and opinion to bet on doesnt strike me as very sound.
Risk
a) We have proportial representation and National is looking very lonely. So they will probably need to govern alone or with Peter Dunne. So unless they get > 50% having the biggest minority for a Govn isnt terribly great for them.
b) The attacks on Cunliffe are interesting, here we have a opposition leader who has the presence to get voted for, unlike the last 2.
"No one has yet gone on to lead a government within 12 months of assuming party leadership."
Except DC took over > 12months.
c) National only just won power last time and their polling has been significantly worse ever since.
d) Winning a third term is a big ask, not a frequent occurance.
e) The asset sales referendum, lets see how that goes, if National doesnt run a decent % yes its handing the opposition serious ammo.
"Data gathered from the New Zealand Election Study since 1999 shows that on average almost 54 per cent of voters will make their decision about which party to vote for before the election campaign."
Yes indeed about now with a referendum right at the right time.
f) Maori party are in the doldrums and mana is chewing them up. Cant say I see much chance of them going National if they even still exist.
g) The world economy is looking sicker every day...party in power will reap taht.
h) The RB looks like its just cooked the NZ housing market possibly to a crisp, the party in power will reap that.
Impact
a) Labour seems to be bleeding left votes to the Greens who are quite left.
b) Mana is pretty hard core left.
c) The Maori party is going to have to pull its socks up and promise to deliver a lot more to its voters if its got any chance in 2014
So these point at a far more left Govn if Labour wins and that means a bigger impact on the likes of PIs etc.
It isnt over til the fat lady sings as they say, lets see where we are in 12months.
regards
ipredict Labour V National runs pretty close.
https://www.ipredict.co.nz/app.php?do=browse&cat=319
regards
Totally agree.
The problem is not of the making of the RBNZ.
It is totally a Government responsibility and made by the ineptitude of this National leadership of the last five years and to a lesser extent the previous one. Uncontrolled immigration and speculation from our own as well as external cash caused the problem and if the banks have to take a haircut as well then sobeit.
Start by a loud signal on what is to come would be enough on its own to make the overseas speccys run for the hills!
I think it's all going according to plan. Just need to make new builds exempt. Then perhaps we can all enjoy a better standard of living with lower house prices and hence lower levels of debt. More money in our pockets to enjoy other things life that don't involve an obsession with bricks and mortar.
The key is that once investors have used up their available equity and hit the 80% threshold, the reliance then returns to new entrants to accelerate credit (and prices) further to enable current owners to pick up more equity. If that mechanism is broken then the best one can hope for is sideways price movement. Add unrestricted new building supply and suddenly we're making some genuine progress.
Auckland does NOT have a housing problem. If it did , why are the 'To Rent' signs so common?
Auckland has a problem of too many investors after a fast buck and starving the market of lower value stock. The banks are feeding the frenzy and deserve to take the medicine if the music stops as surely it will eventually. Then just watch the fast money evaporate.
The unfortunate and (perhaps) unintended consequences of existing land use and taxation policy have made Auckland housing some of the most expensive in the world.
The RBNZ have acted in keeping with their mandate of financial stability.
What was unfortunate and unintended were the housing bubbles and subsequent economic destruction in the US, Ireland, Spain, etc. The RBNZ deserves praise for making a difficult decision. It's too easy to make petty critisisms which fail to see the bigger picture.
Why shouldn't banks and borrowers be free to conduct business as they like? Because they are not capable of assessing risk and as a saver I don't want to be bailing them out.
Zombie: As you are a "saver" you should ask:
Where does the interest you earn, day in and day out, on your savings come from?
It comes from the sweat off the brows of people who borrowed your money and are working hard to repay you.
Without them you would be broke.
The multi property owning landlords and the speculators, plus all the ticket clippers who feed off them are obviously very nervous.
Excessive debt will spell trouble when the music stops.
Keep up the good work Mr Wheeler.
Reading some of the rhetoric here, you must be doing a good job.
In a net debt society, such as ours, the interest you talk of is borrowed to further compound the level of indebtedness. And since it is at the margin borrowed from wholesale foreign lenders who inturn secured it at about zero cost, I suggest Kiwis stop working to pay something that is secured for no effort. I certainly realised the insanity of selling my effort to those who incur no cost in raising the necessary capital other than diluting the buying power of that used to reward said effort.
Wow.
Even BigDaddy acknowledges the approaching maelstrom.
This is going to be a real 'E ticket' ride by the sounds of it.
Sound like the First Home Buyers are doing the smart thing.
Staying out of the market at present, to pick up the bargin houses the speculators and indebted landlords will be desparate to off load.
Keep up the good work Mr Wheeler.
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