Latest house sales figures show that the Reserve Bank is going to need to revisit its strategy to control the scorching housing market

Latest house sales figures show that the Reserve Bank is going to need to revisit its strategy to control the scorching housing market

By David Hargreaves

Well, that would appear to have sent the whole idea of regionally-targeted LVRs up in smoke - before the policy has even taken effect.

Going back a couple of years the Reserve Bank was pretty insistent that it wouldn't look at regional (think Auckland) targeting of 'macro-prudential tools' of which limits on high loan to value lending is one.

It was only the continued incendiary nature of the Auckland housing market, coupled with tepid prices elsewhere in the country, that finally convinced the RBNZ earlier this year to change tack.

So, from next month property investors in Auckland won't be able to borrow more than 70% of the value of the house they are buying. In addition, the 10% 'speed limit' on high loan to value (above 80%) for banks and their new lending, which was put in place for the whole country in 2013, will remain in place in Auckland - but the rest of the country will see the limit lifted to 15%. The only tweaks made from when the rule changes were announced was that the start date was put back to November from October, and a 'speed limit' of 5% was put on Auckland's new investor LVR policy after the banks argued that a zero above-70% limit was not workable.

I suspect the latest REINZ figures showing Auckland prices still surging ahead won't have unduly surprised or alarmed the high-ups in the RBNZ. They will have expected a rush of people looking to make purchases in Auckland before the new rules take effect.

But I think they WILL be alarmed at how investors have already reacted to the new rules by splashing the cash in non-Auckland, but adjacent-to-Auckland, parts of the country.

The RBNZ had intended that raising the LVR 'speed limit' to 15% outside of Auckland would be a precursor to phasing out the limit altogether outside of the country's largest city.

I think you can still assume that the Auckland market will quieten down after November 1. But equally, you have have to think that outside of Auckland things will only get hotter. This is just the beginning, and we haven't even seen the new LVR policy kick off yet.

The Auckland property investors have already given an eloquent answer to the RBNZ. "If we can't buy in Auckland, we will buy somewhere else. We ARE going to buy." In this economic environment and with these low interest rates (and no end in sight) the fact is that Kiwis in assessing investment options see housing as options 1, 2 and 3. And that's it. And if there's plenty of money chasing a limited pool of houses, it will drive prices up. Simple supply and demand.

I agreed with the RBNZ's move to restrict lending to Auckland investors and I happily concede I'm surprised at how quickly those Auckland investors are already frustrating the intent of the new rules - much as mortgage broker John Bolton indicated at an early stage they would. I should hasten to add that I don't blame the investors at all. They are abiding by the rules and they are doing what they feel they need to do.

The only question now is how long the RBNZ will be prepared to tolerate other parts of the country starting to play some serious catch-up with Auckland prices. I don't think it will be all that long and I've already said previously that I think we can all forget about seeing LVRs removed. No way.

As a first step I would see it as likely that, sooner rather than later, the RBNZ will reverse the decision to lift the LVR lending 'speed limit' and push it back down to 10% for the whole country. But will that be enough given that non-Auckland housing investment now has an obvious advantage? I suppose the RBNZ could look at bringing in restrictions on some of the new hot-spots such as Waikato and Bay of Plenty as well as Auckland but, really, it would all start to get messy pretty quickly.

So, in all probability we may well see at some stage next year the RBNZ look at a new nationwide initiative. And that might mean something like a 30% limit for all property investors everywhere. 

Or is it now time for the RBNZ to seriously consider income to debt ratios?

The thinking hats will already be on in earnest at RBNZ HQ. And solutions will need to be forthcoming.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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25 Comments

Oh my! The result of lowering interest rates to hyper-stimulatory levels is to add rocket fuel to the housing market.

Whocouldaknowed this would have happened?

Seriously?

LOL - they ( the finance minister and the attendant entitled ) knew only too well.

Yes SH, And so does the RBNZ, they facilitate the property pyramid scheme. 'Ye shall know them by their fruits'.

Seriously, but has it?

Look at the suburbs that are showing huge gains, do we know how these are funded? not that I am aware of. Look at the other suburbs, towns and provinces, are these showing substantial gains? no, most are pretty stagnant.

There certainly is a large amount of money flowing around the world in the top 5%~10% of ppl. That is many National capitals show substantial gains not just Auckland, so why?

We have LVR's so many FHB's are effectively shut out of the market no matter the rate. So seriously does the rate matter?

Lets say yes it does, like the side effect of a nasty drug such speculation is a side effect we have to accept or the rest of the economy will simply go into serious recession and maybe even a depression.

One thing is certain, credit growth outstrips current nominal GDP growth by a magnitude greater than two. Hence failure to service that debt in the long run is guaranteed - a pending catastrophic bank instability issue that needs urgent attention now, not tomorrow.

I am finding the tendency of crisis response to become long term policy a bit of a theme too. The RBNZ dropped interest rates dramatically as a crisis response but then kept them too low, as policy, until momentum was established in house prices. They then dream up more crisis responses, which then become ongoing policy. I guess the important thing for them is that we believe they are important, when in fact they are just another bunch of useless overpaid government drones.

can we not just keep borrowing to pay the interest? Problemo solved, nothing to see here, move along please.

Are there any bankers out there who could run through how a hypothetical lender may rationalise current lending activities?

To date its been explained to us by saying, "look at all the people that haven't borrowed - they are fine".

http://www.stuff.co.nz/manawatu-standard/news/72925653/supply-and-demand...

Not 'stagnant' for long... watch the reports over next few months for palmy, at 24 days to sell it's looking like a 20% plus re-rating higher in short time for this place, not unlike 2004-2007 as I have often mentioned on here..

Really ! Those rocket scientists at the Treasury and the Reserve Bank need a cracker up their backsides.

All they are doing is tinkering ..............and in so doing are creating an administrative nightmare for themselves and lenders , and locking ordinary Kiwis out of home ownership .

And to what end ,it will never stop the Tsunami ............... there are 23 million people in Shanghai alone and rumour is there are enough US$ millionaires in that city to buy up every house in Auckland .

We need to deal with the problem of demand fuelled by foreigners and migrants .

This whole chaotic mess of rampant house prices can be resolved by simply re-setting the immigration rules, and slapping a 15% transfer tax on foreign property speculators

And its unbelievably easy to implement .

Simply increase ( re-set ) the points required to 200 points for the skilled migrant category and increase the investment to $2,0 million for business migrants ( IN FREE FUNDS .......... NOT LOANS FROM SHANGHAI SYNDICATES )

The 15% tax is even easier , you simply have to prove either citizenship or permanent residence to be exempt from the tax ( so you have to show you are a KIWI or have PR just like you do when you apply for a job) .

12 October 2015
ABC - Four Corners Investigation - The Great Wall of Money

Why the Great Waller's find Australasian property appealing - and aren't going to stop

In this report the ATO Tax Commissioner was interviewed about real-estate being used to launder illicit money - citing the example of a 20 year-old international student purchasing a $1½ million property, then the following week purchasing a $5 million property - his conclusion was while it is easy to identify "probable" illicit money it is impossible to prove where the money came from

For those interested here is the program - for some it will be geo-blocked
http://www.abc.net.au/4corners/stories/2015/10/12/4327525.htm
There is a brief transcript below the video window
Worth making the the effort to view it

Thanks for the link Iconoclast

Does not importing Money Laundering constitute a criminal act. and condoning by our 'Dear Leaders' against theirs and our Constitution.

Or has nothing changed since Convict Influxes made Australia great.

History has a habit of repeating itself. One rule for the rich and one for the poor?.

Under Cha-FTA and TTP you can't introduce "new" restrictions on a single class or group of people - new rules are only permissible if they apply to everyone

You can't have exemptions for permanent residents and citizens and a rule for everyone else

The question for you is - how would you identify a Foreign Property Speculator?
The IRD has had a problem identifying local property speculators for years and years and years

Try setting out a set of criteria for that exercise and see how many holes there are

You are jumping the gun with your predictions.
The new rules only came in a couple of weeks ago and the slow down has started:

http://www.stuff.co.nz/business/72936382/homes-failing-to-sell-at-auctio...

As Olly Newland told you a few months ago: "there will be tears"

http://www.interest.co.nz/property/74363/olly-newland-says-property-inve...

...I give up on predictions. But some have found it extremely difficult to not jump on the PI band wagon over the last 12 - 18 month - but even at this point it semeed screwball to me. I do suspect though that if it blows, it won't be uniquely Auckland, it will be Sydney, Vancouver, London, San Fran etc...why would Auck be the outlier?

the widely held belief is there will be no blow just a stabilising, i hope they are right they thought the same in the USA, spain, ireland, queensland

Until the mid 1980's there was a stamp duty of 1.5% paid on all house sales. It was difficult to borrow more than 66% of the purchase price. Interest only loans were not available and you could only have repayments taking up 25% of your income. The term for full repayment was not usually more than 20 to 25 years.
Enforce all of the above and the house prices would drop significantly and then hardly increase for a decade.

the stamp duty cost just as much to enforce as it collected, agree with the rest but too late now.
i saw a report the other day that stated people buying today will still be paying off the mortagage when they hit 65, wont matter by ten as they will have to work until 75 to get any super

except if its imposed as a policy thing preventing foreign purchases then the cost being neutral is acceptable.

Stamp duty was applicable to Bank instruments, insurance policies, and Land Transfers
You will note that it was claimed to be cost ineffective the minute the banks got their teeth into it and taking over the insurance companies - your favourite shadow-man banking lobbyists at work
The problem was the 1½% - at 15% it would be worthwhile because it would be worthwhile and collected at source - wouldn't have to be chased

As noted before if you borrow for example $700k at 5% is not the same as borrowing $500k at 7% because at the end of it all you have to find the extra $200k of capital to repay.
If we have very muted inflation for years ahead that $200k is even more of a hurdle.

Tauranga house prices are below 2007 prices in real terms... .yet you are somehow purporting controls are needed. I bought in 2007 and have lost money after accounting for inflation.

But house prices always go up or so i am told daily

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