Central bank's decision to target Auckland for lending restrictions has to be applauded

By David Hargreaves

Well, the Reserve Bank is certainly having a go, and for that I applaud it.

Something had to be done about the runaway Auckland housing market.

The key change in the new restrictions announced today is of course the decision to specifically target Auckland, while actually relaxing the lending criteria a little in the rest of the country. This kind of specific targeting is something the RBNZ was previously reluctant to do, for reasons that were never clear to me.

Perhaps the one thing you would say on that though is that in previous economic cycles any rise in Auckland house prices has quickly led to rises elsewhere in the country too. But that is absolutely not happening now.

By applying blunt-instrument policies that crack the housing market on the head right around the country, the RBNZ would potentially suffocate the market in the regions - given that the places other than Auckland are not witnessing overheated conditions. What we might now see is that some investors - and indeed potential first buyers - might now look beyond Auckland for house purchases. If the rest of the country now gets a bit of a pick-me-up then that would be a good thing.

The other good thing is, that by announcing the new measures now, the RBNZ is clearing the decks to allow itself to drop interest rates - though whether that will be as soon as next month as the likes of the ANZ are calling for, I would question. I would still go for rate cuts in October and December, leaving us with an Official Cash Rate of 3% by the end of the year.

But, anyway, while I congratulate the central bank on its intent, what the RBNZ has announced today looks to me like a hastily gathered bucket of water. It's the fastest response the central bank could level at the Auckland market right now.

The apparent hastiness of it should clearly tell people just how seriously worried the RBNZ has become about the Auckland market. The depth of its concern will have been increased by the absolute refusal of the current Government to do anything about short-term demand issues in the Auckland market.

The Government is sticking to its 'supply, supply, supply' mantra. But of course the perceived shortage of houses in Auckland is not going to be fixed any time soon. In the meantime the demand pressures - and remember the RBNZ reckons about 40% of houses being bought in Auckland are being purchased by investors - are blazing.

I don't think today's measures in themselves could be expected to put out the fire, but they are intended to at least stabilise the blaze while the RBNZ brings in the full fire engine.

Remember in March the RBNZ announced plans to look at recategorising housing loans held by property investors. At the time the central bank indicated this move could be a pre-cursor to introduction of a new macro-prudential tool, following the earlier introduction of the 'speed limits' on high loan-to-value lending.

All this is still going on. Looking further out from the spectacular headline news of today's announcement, the more key things are how much capital the banks will be required to hold against mortgages to investors, and also the outcome of the RBNZ's review later in the year of bank capital requirements.

The banks have been put on notice. The RBNZ wants to see caution in the banks' lending policies. It is all sensible stuff.

What today's measures, however, are certain to do is increase the volume of the chorus of complaints about the level of overseas investment in the Auckland market. Expect that this will progress from a chorus to a scream.

The fact of the matter is that the RBNZ itself is powerless to do anything about people driving house prices up by paying for the house with good, hard cash.

The anecdotes tell of hordes flocking from Asia with suitcases stuffed with cash and blowing the locals away at auctions as they buy house after house.

There's no doubt there is some of that going on. How much of it - unless we choose to be guided solely by feverish anecdotal gossip - we don't really know.

Disconcertingly our central bank is also admitting it doesn't really know - though Deputy Governor Grant Spencer was illuminating today when he said that the bank's reading of the situation was that as much as 20% of house purchases were of cash buyers (which is a lot), while 8-10% of purchases were "new entrants" not classified as first time buyers.

Therefore the RBNZ thinks that perhaps 10% of purchases are cash ones from overseas buyers.

If true, that's significant.

But it again highlights that this Government has got to get up off the thing it is sitting on and actually gather these figures. Let's for goodness sake find out who is buying, how and where. It would be so simple to organise it and this Government is just being reckless by not at the very least taking that step.

I will leave any talk about how the Government should be looking at taxation, migration, foreign ownership limits etc measures for another day.

All I will say is that the brooding resentment in the Auckland market about foreign ownership is likely to come rather more sharply to the surface as some Kiwi would-be investors realise that today's measures are going to crimp their opportunities of buying a ticket in the Auckland housing raffle.

So, will these measures work?

For starters, the October 1 beginning date is something the banks will probably fight all the way. Don't be too surprised if we don't see it eventually moved back to December.

But what the RBNZ will be hoping for by announcing the plans today is that there will be the kind of shock that we did see ahead of the LVR restrictions in 2013.

What we saw then was that the banks pulled back sharply from new lending because they were simply uncertain about how they would be able to meet the new criteria.

So, we might see a pause for breath in Auckland, followed by a sharp exhaling as the usual suspects vent their spleens about what a dumb idea these new RBNZ measures are and what damage they will cause.

But the RBNZ, unlike the Government, realised that something needed to be done.

I go back to the point, however, that this action is a bucket of water. The RBNZ needs to be backed up ultimately by a Government that is prepared to shut up for a minute about supply, supply, supply and realise it is in our nation's long-term interest to bring a measure of legal control into the levels of housing investment.

Unfortunately this Government is just likely to take the action by the RBNZ as it's cue to keep sitting on the sidelines.