The Reserve Bank has some tough decisions to face this coming week on the runaway housing market

The Reserve Bank has some tough decisions to face this coming week on the runaway housing market

It was not so long ago that Reserve Bank Financial Stability Reports were a bit of a snore.

These six monthly reports on the soundness and efficiency of the New Zealand financial system have been produced only since 2004 and were originally an opportunity for the central bank to dryly observe that the wheels were all going around as they should, that there were these little areas of concern, here, here and here... but if we were all good boys and girls and behaved ourselves, things would be fine. Roll over. Back to sleep.

Not these days though.

It might be argued that next Wednesday's (FSR) will be more closely watched by the banks and the marketplace than recent Official Cash Rate review announcements. This would be saying something because all the recent OCR announcements have been very much 'live' as to whether the RBNZ would 'stick or twist' with interest rates.

However, the advent in 2013 of the RBNZ's new 'macro-prudential toolkit', specifically aimed at financial stability issues, and the growing heat around the Auckland housing market, and now regional markets too, has meant the FSR announcements are becoming a bigger and bigger deal.

Last May's FSR did come complete with a hand grenade lobbed in the direction of the Auckland house market, namely the minimum 30% deposit restriction put on Auckland housing investors. This was a tweak on the LVR macro-prudential tool that had been unleashed toward the end of 2013 via an initial 10% 'speed limit' for banks on the amount of new high LVR lending they could undertake. 

Also announced in that FSR was a loosening of the 'speed limit' to 15% outside of Auckland.

Both those measures took effect in November.

No slowing

Six months later we can now see that the 30% deposit rule in Auckland has not slowed investors down. The case is, rather, that some investors have simply been encouraged to go elsewhere, hence markets such as Hamilton and Tauranga now really taking off. The move to loosen the 10% limit for banks on high LVR lending outside of Auckland would appear to have contributed to the heating of non-Auckland markets.

I think, though the RBNZ won't admit it, that the reigniting of the Auckland market from March onwards was the principal if not only reason why the central bank didn't cut the Official Cash Rate from the current 2.25% last week. This, in my view odd decision, has been made to look more odd by the Reserve Bank of Australia's move this week to cut rates across the ditch to 1.75%, meaning there's now a half a percentage point difference in the rates between our two countries and our dollar's flying, something the RBNZ absolutely does not want.

The inherent conflict between the central bank's monetary policy and achieving inflation of 1%-3%, and on the other hand, its financial stability role, is absolutely raging. I've said before and will say again, this conflict between the RBNZ's two roles needs sorting out. In the meantime in my view it is absolutely wrong that the central bank is using one arm of its designated areas of responsibility to lean against the other. In this case it's using monetary policy to back its financial stability mandate. It should not be doing that.

Presumably the delay in OCR reduction last week was to give more time to load up on more financial stability measures against the housing market.

Loading up

So, given that the RBNZ is certain to be under even more pressure to cut rates at its next review in June, the real question is whether a grenade, or perhaps a bag of grenades, is going to be furnished at the coming week's FSR.

The additional consideration in all this is the Government's May 26 Budget. Last year there was some co-ordination between the RBNZ and the Government, with the RBNZ announcing the new Auckland-centric LVR rules, while the Government made tax rule changes.

It seems likely there will be something else from the Government in the Budget this year. Whether it will be John Key's ruminated-on land tax for offshore-based investors, or something else, we shall have to wait and see. Just on that, I've got to say my preference would be for a land tax targeted at both NZ-resident and offshore-based investors on undeveloped land.

As for the RBNZ, the question is whether it's had time to develop some new measures, a new 'macro-prudential tool', perhaps. My inclination is to say it hasn't had that time. Remember, the RBNZ did want to see how it's Auckland-focused investor measures fared before introducing anything else. And I would be certain that the RBNZ has been taken aback by how quickly any impact from the November-introduced measures dissipated.

More ahead...

So, I think in all probability we'll be looking toward the end of year for completely new measures from the RBNZ. I still reckon we may see some form of debt-to-income ratios introduced at some point.

If we assume there won't be any new rules brought in at next week's FSR, will there be tweaks of existing measures? Well, depending on if the Government's got something lined up for the Budget, and what that turns out to be, a tweak of some of the RBNZ's existing LVR rules next week would have to be a live possibility.

If a 30% deposit rule for Auckland investors didn't work, how about 40%, or even 50%? It might be considered worth trying as a stop-gap measure.

Of course, however, if the RBNZ did up the ante against Auckland investors, the thinking would be that this would increase the charge of those investors into the regions, further warming some already now very parts.

The indications from the RBNZ up till recently anyway, have been that it is comfortable to allow a certain amount of catch-up by the regions on Auckland's prices - though I would stress that given some of the inconsistencies that have been coming through from the RBNZ's messages in recent months, caution needs to be applied in taking the central bank too literally.

Auckland, and the rest later

It may be though that if there is to be something announced next week it will be aimed again at Auckland and then we will see something wider applied to the rest of the country later. If the regions really do start running rampant (and if we saw deposits of 50% targeted at Auckland investors, then regions MIGHT well go feral), it would be a stroke of a pen job for the RBNZ to tighten the LVR speed limits in the rest of the country back to 10% and higher minimum deposits for investors in the rest of the country could be brought in too.

At the very least we can expect some strong and cautionary words about the housing market in the coming week's FSR. And my bet is we will see some 'tweaking' of the LVR rules, but not massively. But nobody with an interest in this game should be feeling too relaxed, because it is to be imagined that the second half of the year will bring more. Much more.

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?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Reducing demand increases supply. Stop the immigration. We can't keep up with it no matter what the government does for a least a few years.

NO NO, NO, don't stop immigration completely ....... we must take foot off the pedal for a while , and the Government needs to communicate its immigration strategy and plans in clear fashion

Closing to door is just crazy , we need to just hit the reset button for while until:-

1) We can get on top of current the housing crisis .
2) Then Govt should SIGNAL to the people their target immigration numbers , so we can gear up for the influx
3) We have a clearly articulated plan , strategy and roadmap on how to cope with the crowds of immigrants arriving here

Right now we appear to have this uncontrolled tsunami of migrants arriving here, seemingly without any plan or strategy on how to cope

Close the door to "students", chefs, restaurant managers etc which are all very common methods of putting down a ladder for the family. Where are the dentists, doctors, carpenters etc?

Probably working somewhere less of a disaster.

50% deposit for investors?
That sort of action would be circumvented in 10 minutes flat.
Investors would quickly form syndicates and carry on as before;
So long as there is easy capital gain to be made no regulations will stop the herd from stampeding on.

The syndicate still has to put up 50%.

All residential property, for rental, requires registration and subject to Capital Gains Tax.

Spot the Envy taxers. 25 year olds expecting to buy a 3 bed house in Remuera on 1/4 acre for 350k.

Or those on a minimum wage who struggle to afford much over 350k.

Owning a house is not a birth right. You've never been able to afford a house on minimum wage so how are we different now?

how are we different now?
We've got half the country on minimum wage now. Statistics NZ Median income is $600/week equivalent to $15/hour before tax and after government transfers. Half the people earn less than that, maybe 60 or 70% can't cover all their costs and put a roof over their heads owned or rented. The collapse of our viable, independent middle class is how we're different now.

Median weekly income of $600 is NOT equivalent to $15 per hour as the median weekly income calculation includes part time workers.
At present, the median hourly earnings are about $23. So, a full time worker on a median pay gets over $900 a week (and that is before Working for Families or any other Gov. transfers).

Thank-you Alex13, it is such a shame that journalists don't correct more of the people who post incorrect information.

You've just pulled those numbers out of your backside. Don't ever let facts get in the way of a good yarn.

Would a three bed house in Kumeu for 350k be an acceptable expectation? How about at age 35? How about even 500k? or 600k?

Tell us, wise one, exactly what our expectations should be? Then apply them to yourself at the same age.

Housing costs in Auckland are on another planet. Trivialising the problem just makes you look stupid.

What I did? First place was a 1 bed flat bought at age 29.

You bought a one bed flat where, for how much, in what year? What's the price of the same flat today?

Achievable for your 29 year old self?

In West London, 2004, paid £135 would sell tomorrow for £350. Yes it would of been. Would of had to save for 2 years more but yes, dooable.

So the price has gone up 159%.

Has the salary for the job that you had as a 29 year old also gone up by 159%? I'm guessing not. Maybe it has gone up 25%-30% (roughly 2% a year compounding).

If your house price went up by a similar amount as your salary for the same role, it would only be worth £175k. Half the price you could sell it for. Sounds about right.

Not even close to being right. The interest rate has gone from 7% to 2%. You seem to forget that variable. Yes the salary has gone up around 30% for that job.

Interest rates don't affect the ability to get a deposit together.
If anything, they make it harder as your savings earn less whilst you are getting it together.

Never said they did. Didnt go out for 3 years and lived like a pauper. Mum gave me a little loan which I paid back. You could do the same.

Never said they did. Didnt go out for 3 years and lived like a pauper. Mum gave me a little loan which I paid back. You could do the same.

To be fair interest rates in the UK are stupid low at the moment, much lower than the 2000's. If you can stump up a 20% deposit and the stamp duty you can get a 1.79% rate.

But its the principle that will kill you in the long run.

UK rates are going nowhere for a decade. Everyone has turned Japanese. Principal gets eaten away by your 3% annual payrise.

Most UK people are getting much much less than that annually. 1% if you are lucky.

As a contractor, I got a 7.5% pay cut this year give or take thanks to Osborne's new dividend tax grab. :(

Sounds like its achievable to your 31 year old self then. In Auckland during those two years of extra saving the price would also increase an additional 40%.

Do not pass go. Do not collect $200. Watch those goalposts keep moving further away.

Auckland prices won't go up 20% YoY forever. When rates bottom out - it levels out. Still 1.5% drops to go in NZ by my thinking. Might take a couple of years yet. Then there is Govt help for FTB schemes to come, funding to get developers building etc.

I agree. But I've been proven incorrect for several years running now. It just keeps going, despite the woeful salaries kiwis earn. Imagine being the owner that much debt when the next interest rate cycle comes along. Horrific.

Subsidies are the worst thing they could do. Ugh. Straight into vendors pockets.

What about a 25 year old expecting to buy a 2 bedroom house in South Auckland for $400k?
Very few of these come about.

Your clear exaggerations do more to promote your arrogance than it does to support your argument.

Gotta start somewhere. Buy anywhere with little or no social housing and wait for gentrification. What do you really expect?

You pretty much nailed it but you forgot to add an extra bedroom a new BMW and a new Audi parked in the driveway. Expectations are just way too high. You can still do it even if your on a single income if your prepared to really live tough for the first 10 years, I managed it.

Id just take equity out of another place to get the 50%

Yeah, that trick doesn't last for too long at 50% deposit requirements.

I know a lot of people did it for 10% and 20% deposits, but you end up having a lot more skin in the game at 50% deposit, and your returns are much lower as the leverage effect decreases.

Add rates dropping and it lasts long enough to get another 10-15% uptick.

If there was a tax on overseas resident owners would this just result in overseas residents setting up NZ companies and Trusts and continuing as usual? Not sure if this would happen a lot but seems very hard to police.

Investors are the ones increasing demand. Limit them to a maximum of two investment properties each.
If they still want to invest their capital gains why not try something productive like a business?

Good points. An investor who bids again potential owner occupiers is effectively forcing them to become rent payers. We should limit investors to one existing home, and after that new builds. Overseas investors new builds only. Empty homes or underused development land, including subdividable homes, should pay land tax to compensate for the supply-demand imbalance that creates.

How long will the RBs PTA of 2% inflation be deliberately not achieved?

How can the RB be expected to fix a ruined city, with the floodgates of immigrants, students(here for work mainly) , refugees of broken countries, corrupt foreign investors, gates open wide?

A 50% deposit for investors in Auckland would be fantastic! We need to spread the fire to other regions as quickly as possible.

A 50% deposit for investors would kill all.

"...... the central bank to dryly observe that the wheels were all going around as they should, that there were these little areas of concern, here, here and here... but if we were all good boys and girls and behaved ourselves, things would be fine. Roll over. Back to sleep." And according to Dr Smith there is no housing crisis...?
I wonder if this implausible reassuring patter is an effort to forestall panic and is a reflection that they are scared S....less and have no idea what to do next.

The govt should get back into building housing en masse. For sale, and rental.
That would take the heat out of things.
There's no way 'the market' will be able to address Auckland's issues. We need a bit of good ole fashion socialism.

That would be Labour's "KiwiBuild" policy from last election.

It is strange how people seem to think that an individual should be able to buy a house in Auckland while on a minimum wage. It has never ever been possible.

Two people need to get together and work toward buying a house. First saving the deposit and then devoting one salary to paying the mortgage while living on the other.
The best entity to achieve this is a man and wife.

To be able to do this as a single will require an above average salary and compromises like not buying in the greatest location or buying a small apartment or not buying in Auckland.

Hopefully the so called housing crisis in Auckland will encourage traditional couples who are committed to marriage. A key aspect of my Elysium project.

Just don't have kids right?

Child care or perhaps inter-generational support? This is where some aspects of Chinese culture comes in handy.

Like importing them en-masse cause the kiwi birthrate is so low due to being priced out by the aforementioned. Winning strategy.

Do you want a big picture answer to that?

if so, the answer is, yes dont have any.

LVRs have probably done their dash. I think stress testing lending to interest rates, or using income multiples for lending would be more effective from a financial stability point of view. I agree with you though David, and suspect we’ll just se tweaking of existing measures.

Zac: "The best entity to achieve this is a man and wife."
What about same sex couples ?

ObeseBallerina : 350k one bed in West London. Sounds cheap. So your plan is to buy up NZ properties whilst earning pounds in the UK? I can see why you are against the Stamp Duty on investors suggestion.

Surely you must have some sympathy for FHBs in NZ on lower wages with higher living costs than the UK?

These macro-prudential tools are just as they sound , a fancy name for something that does not work .

They don't work simply because the RBNZ has no control over immigration, cheap foreign money flows (hot money) , or that august body of bureaucrats called Auckland Council who couldn't organise a drinking session at a rugby club