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Gareth Vaughan argues the RBNZ's LVR 'speed limit' policy stacks up favourably against its hysterical opposition

Gareth Vaughan argues the RBNZ's LVR 'speed limit' policy stacks up favourably against its hysterical opposition

By Gareth Vaughan

Reading some of the hysterical reaction to the Reserve Bank's ongoing restricting of banks' low equity mortgage lending you'd almost think Graeme Wheeler was committing a crime by making it harder for young New Zealanders to fulfil some perceived birth right of gorging themselves on 95% mortgages.

Here are but five examples.

The NZ Herald; "Yesterday's Reserve Bank decision to continue keeping a tight rein on residential lending has shattered the dreams of many would-be first home buyers."

A Radio New Zealand story that began with this line; "Real estate agents and lenders are calling for home lending restrictions to be removed, saying they have done their job."

Then there's Labour housing spokesman Phil Twyford, who has been continuously blaming the Government for a policy John Key clearly didn't want (and didn't think would work), and has shown the Reserve Bank asserting its independence.

"When even hard boiled property investors like Olly Newland say first home buyers have been shafted by loan to value ratio lending restrictions, surely it is time for the Government to listen," said Twyford. "Auckland landlord Olly Newland said today that under LVRs first home buyers have disappeared from the market because they cannot raise the minimum deposit, leaving the market to property investors and the wealthy."

Real Estate Institute of New Zealand CEO Helen O'Sullivan; “The long-term implications could be that first-home buyers give up on home buying and that’s fine if they turn to other investments but not if they just end up buying jetskis.”

And the restrictions on banks high loan-to-value (LVR) residential mortgages are also crippling provincial towns, according to Andy Stewart, a REINZ district forum member for Manawatu.

"I know that Wanganui sales have slowed. LVRs were supposed to slow the Auckland market but they have crippled provincial towns," Stewart said.

So based on those comments the LVR restrictions have been a colossal disaster, shafting first home buyers, ruining New Zealand's provincial towns, letting fat cat property spruikers get richer, and Wheeler should resign in disgrace.


Banks not being allowed to do more than 10% of their mortgage lending to borrowers with deposits equivalent to at least 20% of the house price has undoubtedly made it harder for would-be first home buyers. But is having to wait longer, save more money and take on less debt really a disastrous long-term financial recipe for someone starting out on the property ladder?

As Wheeler told Parliament's Finance and Expenditure Select Committee the LVR "speed limit" has helped reduce Auckland's annual house price inflation from around 17% to around 8.5%. Should a responsible central bank governor have just sat back and let house price inflation continue at 17% or higher? More broadly the Reserve Bank's Financial Stability Report had national house price inflation at 9.4% in September last year and just 5% in September this year. The LVR restrictions aren't the only reason house prices aren't rising quite as fast - overall - as they were. But they're certainly a factor.

Numerous international surveys have shown New Zealand house prices at dangerously high levels including a recent survey from the Bank for International Settlements, the central bank's bank, showing a New Zealand house prices to disposable income ratio at almost 140%, one of the highest levels from a broad range of countries surveyed. The value of 140 indicates the ratio is 40% higher than the historical average.

Wheeler also told the Select Committee Core Logic data showed the proportion of sales to first home buyers averaged 19% over the last decade, and had only fallen to 17% since the introduction of the LVR restrictions. That's not as big a drop as anecdotal evidence - mostly via the media - would suggest.

It's important to remember the bank lenders themselves have a role to play in terms of who gets high LVR loans. Shortly after the Reserve Bank implemented the policy, Kiwibank said it would prioritise first home buyers over property investors in terms of the distribution of its high LVR quota. Other banks could do the same.

And as New Zealand Institute of Economic Research (NZIER) principal economist Shamubeel Eaqub points out in his book, Growing Apart, Regional Prosperity in New Zealand, there are plenty of other issues challenging regional New Zealand aside from housing.

Wheeler, meanwhile, listed issues driving strong house price inflation as supply shortages, interest rates at 50 year lows, aggressive bank lending and rising net migration. On the housing supply and cost side we also know there are issues around high land and building materials prices.

Against this backdrop the LVR restrictions have slowed down the tap pumping credit into the housing market. In September this year just $359 million worth of bank lending was done at LVRs above 80%, down $828 million from $1.187 billion in September last year. And despite widespread talk before the restrictions were introduced of borrowers and banks rorting them and non-bank lenders moving in to fill the gap, there has been little evidence of this so far.

That said, the longer the LVR restrictions are in place the more chance they'll be rorted on a material scale. I think the Reserve Bank knows this, which is why they keep saying the restrictions are a temporary measure.

You could argue, as NZIER has, that another tool might have been preferable to the LVR restrictions. For example, the Bank of England has decided no more than 15% of banks' new mortgages should be loans equivalent to more than four-and-a-half times a borrower's income. But the fact the Reserve Bank was prepared to act on a property bubble against the wishes of the government, the real estate industry and some in the banking industry, should be applauded.

As for the property investors, they're also in the Reserve Bank's sights. Wheeler's deputy, Grant Spencer, said the central bank's still working on plans to make banks hold more capital against loans to owners of multiple rental properties. Spencer said the Reserve Bank is working on how to categorise a borrower as a residential investor, noting it could be based on the proportion of their total income that's coming from their investment portfolio, rather than just the number of houses they own. This could make loans more expensive for property investors, and potentially harder to obtain.

Already there are questions over whether such a policy could work. A couple of the concerns thrown up are what to do about trust ownership, and when an investor has mortgages with different banks. But critics also thought the LVR policy would be too hard to implement. So I wouldn't necessarily bet against the Reserve Bank getting this one right too.

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It could be worse and it should be worse -for landlords.
The reduced home ownership percentages particularly in Auckland is the problem to be addressed and literally not one politician local or national has made any comments about that one.
Bernard Hickey on Q&A failed to fire any shots regarding the influence of rentiers not just competing with the FHB but actually over a few years reducing the available housing for owner occupiers.
Apart from immigration plus foreign investors influences (again not mentioned) the gearing available to landlords in a rising market is the basis of the distortion.
LVR  restriction is minimal when compared to possibilities of non deductibility of interest or an equivalent levy on  landlord interest payments.

The Wheeler designed LVR restrictions have been in force for 12 months
With Auckland property prices increasing by +10% or more over that same time period, any property speculator with 5 or more properties will have escaped those restrictions because the total of their equity in the first 5 will have increased by more than the 20% deposit needed for the "next one"
No trouble at all

Interest for "investors" in the housing market should be commercial as they will be the first to tell you they are running a business.
It's pretty disgusting really, the only reason so many people get into this leech market is because it IS actually easy, at the end of the day, and that needs to change, big time, and soon.

"When even hard boiled property investors like Olly Newland say first home buyers...".
Tui: Olly IS the best spokeperson for first home buyers. Yeah Right.

Yes notch.  The "Tui" of the week.

Gareth, you should at least have the courtesy to ask Olly Newland to give a fuller explanation of his views instead of  rushing into print without  the full picture . He has had 55 years full time in the property market and would know more in his little finger then all the economists and pen pushers put together.

Well stop posting as 'Big Daddy' Olly and provide a fuller explanation of your views :)

Yes, but Big Daddy (sorry I mean Olly), has in the past posted comments about renters that are extreemly demeaning and derogatory.  
His whole business model is based on investing, or how to invest.  This is at odds with the FHB, where any investors continue to push FHB’s out of the market.
Phil has a screw loose using FHB and Olly in the same sentence imho…

Wheelers rationale
A FHB wanting to get into an entry level 3 bedroom house of $500,000 1 year ago, needed an 80% deposit of $100,000
Now today, 12 months later
Based on Wheelers estimated housing price escalation of 17% would have had to pay $585,000 needing an 80% deposit of $117,000
Due to Wheeler's timely intervention, the price escalation of only 10% now costs only $550,000 needing an 80% deposit of $110,000
Wheeler has saved them $7,000 on the deposit, yet, they are still $43,000 behind

Well said.

Ah I detect a change in view from you......some of us have been on about LVR's not being a very good tool for quite some time.......and you have always advocated LVR's were a good thing.

LVRs should have been localized and only a part of the solution to a multi-faceted problem

Hang on - everybody's always going on about how much cheaper houses are out outside of AKL and ChCh.
So if FHBs can't save 20% of a cheap(er) house outside of these 2 centres:
1) why should they be exempt? The same problem still applies, they're taking on too much debt.
2) why can't they manage to save 20%, seeing as these houses are super cheap, anyway? (or so we keep on being told by some pundits who want them to up sticks and move to the boondocks)

And how would one localise the Old Tie Club Raegun?    FHB are an easy target to discriminate against......and the Old Tie Club will ensure their offspring can get into a house........
The RBNZ should have kept its nose clean.......if people can afford the mortgage payments then let them borrow 100%........why enforce them to save and pay rent when prices are rising?  The outcome will be higher levels of debt down the track as LVR's are just postponing the borrowing to another point in time.
LVR's are nothing more than an abuse of power against the powerless!!
If NZ wants affordable housing then let people build houses!! Remove the granted powers from Councils, BRANZ and the plethora of other parasites who insist upon abusing sections of the populace.....The world is not going to tip over if you remove the powers from those people sucking a living at someone elses expense......
The discussion should be about free market vs controlled market!! And when you have a controlled market someone, some group is always going to be discriminated against.....and this should be labelled as State abuse.....
The RBNZ being independent is no longer serving the best interests of NZ'ers........

Yes well, I am for even more control, especially in the form of foreigners being able to buy. Keep them out and I suggest your idea of no LVR would be entirely possible

What do virtually all of the critics have in common? They have vested interests.

What some of the critics probably know is that the FHB and their debt are an enabler of increasing house prices.

If a FHB can't save 20% then how are they going to repay the debt? If the response is 'they end up paying a lot more because prices always go up' how sustainable is that and how does the next generation afford a house?

Ponzi. I think you've hit the nail on the head. Unfortunately RBNZ say that LVRs are temporary. But in general, policies with a long term aim do have some short term side effects which if viewed in the long run scheme of things, are minor. Yes whats wrong with biding their time and saving more. Aucklands high house price inflation CANNOT continue indefinitely.
All the women who want to work now do work so there's no more household earnings to be had from that source.
I would like to know how old these property investors are. A graph would be nice. That would tell us when these properties are likely to be put back on the market.
Another one is: what happens if a big tsunami wipes out the waterfront homes? What does ollie think about that scanario? Prices go up inland maybe. Haha.

Precisely, it is absolutely in the interests of the rentiers that most of the popuation remain in straitened circumstances and when you consider how many properties so many of these have, that is a LOT of people who have to stay down to keep them up. Changes needed, desperately.

In the words of the Rainmakers (Government Cheese):
"They'll turn us into beggars cause they're easier to please."