By David Hargreaves
The real estate industry is firing off its guns in the wrong direction with calls for first home buyers (FHBs) to be exempt from the Reserve Bank restrictions on high loan to value ratio lending.
Talking about the plight of first home buyers in isolation now is fiddling while Rome burns. It’s an answer to the wrong question.
The ability of first home buyers to get into a home now is not – according to cold, hard, figures – as bad a problem as it has been in the recent past. The current RBNZ LVR settings have actually modestly improved the situation for the FHBs.
The real problem in the housing market is that the current LVR measures are too heavy-handed across the whole market. The limits of LVRs to control the market have seemingly been reached. The RBNZ as a matter of some urgency needs to be able to apply alternative measures that arguably could keep the market under control – without suffocating it.
The RBNZ cannot and will not relent on its LVR rules at the moment – because it simply doesn’t have a back-up plan if the housing market takes off again.
The RBNZ's chosen back-up plan was debt-to-income ratios. And it is true, not everybody agrees with those - though I think they would be worth trying and certainly should be available for the RBNZ to use..
Just on Monday former RBNZ staffer Ian Harrison of Tailrisk economics issued a paper saying the RBNZ's justifications for possibly imposing DTI limits on housing lending, "shows that that they are deeply flawed", with the main problem that the "DTI is a crude tool".
But the fact is the Government, by pushing back on the RBNZ's chosen plan - but not coming up with any viable alternatives - has left the RBNZ currently without sufficient back-up for the LVRs.
The issue has become complex. It is worth looking at how we got here:
The RBNZ introduced LVR ‘speed limits’ in 2013. These were part of the new ‘macro-prudential toolkit’ signed off in a memorandum of understanding between the RBNZ and then Finance Minister Bill English. In a decision it must seriously regret, the RBNZ didn’t then push to include DTIs in that toolkit.
While there were justifiable complaints that the new LVR rules were tough on first home buyers, they worked, and the house market eased back. But the first home buyers retreated, becoming unfortunate collateral damage in the bigger scheme of things.
By 2015 the Auckland housing market was roaring again. The RBNZ, which had resisted calls to specially target the Auckland market, now changed its mind and introduced Auckland-specific LVR measures in late 2015.
It just didn’t work. Such cooling impact as there was only lasted a couple of months. The RBNZ must have been very surprised how ineffective it was. The central bank’s earlier misgivings about Auckland-centric LVRs possibly producing distortions in the marketplace proved entirely justified.
What happened was that cashed-up Auckland investors moved further afield and out into the rest of the country looking for bargains. The Auckland LVRs arguably helped to set fire to the housing market in the rest of the country as Auckland money poured into the regions. It was a classic case of unintended consequences; of a policy designed to help actually spreading the problem.
Such a spectacular failure were the Auckland LVRs that by the middle of last year the RBNZ was completely caught out and running short on ammunition to fight a housing market that was again a raging inferno – but now right across the country.
By this stage the RBNZ was seeing DTIs as an ideal solution to the hot house market.
Problem was it didn’t have them available. It didn’t seek to get them put in the macro-pru toolkit when that was approved in 2013.
Bring out the blunderbuss
So, what it did as an immediate band aid solution was bring out the blunderbuss, and aim 40% deposit limits against housing investors.
Then it went to the Government looking for permission to add DTIs to the macro-pru toolkit.
The Government pushed back and finally came up with the delaying tactic of getting the RBNZ to consult on the issue. DTIs in my view are now unlikely to be approved in the foreseeable future as potential macro-pru tools. But the point is, the Government in stripping the RBNZ of its chosen choice of action, didn't suggest any alternatives.
This Government has simply been super-reluctant to address demand-side issues on housing, even when the RBNZ at times has implored it for help.
So, the RBNZ has often been left out on a limb, trying to do the Government’s job.
Make a difference
That’s not fair. It is the Government that could and should have been making the difference here.
The current LVR regime is too heavy-handed, I have no doubt. But, it is also worth bearing in mind the LVRs are most certainly not the whole reason for the cooling market. Mortgage interest rates have been lifted somewhat and the banks have been ‘rationing’ credit due to their own funding pressures stemming from a shortfall of depositor funds. The banks have clearly used the RBNZ as ‘cover’ for tightening up lending criteria.
The tightening up is across the market. It is not an issue specifically related to FHBs.
For the sake of clarity, it is worth looking at where the FHBs currently stand in all this. The reality is that the real estate industry is calling for action on a problem that has alleviated in recent times (though nobody should pretend that the current situation is ideal).
FHBs with more room to move
The proof of this comes through the excellent monthly mortgages by borrower type figures that the RBNZ collate from the banks and has been publishing since August 2014. It’s terrific information.
What that information says is that FHBs have had more room to move in the housing market since the 40% deposit rules were clamped on investors, effectively from late July last year (though not officially till October).
Since then, FHBS have made up a significantly bigger portion of the overall borrowing amounts. In dollar terms the amount borrowed by FHBs has been at or above the levels seen before the 40% rule came in. The retreat of the investors has been giving them more of a fighting chance.
The latest figures available are to June and it is worth crunching them a little.
In nine of the 12 months since the July 2016 announcement of the 40% deposit rule for investors the amount borrowed by FHBS has actually increased when compared with the same month a year previously.
And this is in an overall environment where total borrowing is hugely down month by on what it was before the LVR rule changes.
For example in June 2017, FHBs borrowed $713 million, slightly down on the $738 million this group borrowed in June 2016. But the overall amount borrowed dropped by a quarter – which in dollar terms was a thumping $1.7 billion – compared with the same month a year earlier. Most of the drop came from investors, who borrowed less than half (at $1.2 billion) what they had in June 2016.
So, the very latest LVR measures, have indirectly actually helped the FHBs. Things are not ideal for FHBs, but the retreat of the investors is giving them more of a chance.
The RBNZ would therefore argue that to this point the LVR measures (introduced as they may have been in a mood of something approaching desperation) have worked.
But clearly they were a sledgehammer to crack a walnut.
The real estate industry is therefore rightly concerned. But it is applying the wrong solution to something that isn’t even the real problem today. Putting a distortion into the mix now – such as exempting a class of buyers – would muddy the picture.
Government should step up
It is the Government that should have been stepping up and ensuring that the path for the housing market in the future is smooth.
And that’s where the pressure from the real estate industry and all interested parties should be applied.
Make it clear that whoever is in Government after September 23 should stop playing politics with people’s livelihoods and where they live and would like to live.
Whatever the consensus views on DTIs, the RBNZ should have a sensible, practical range of macro-pru tools available. I don't have a problem with putting DTIs into the range of available tools. Why not have as broad a range as possible? But if there's another measure that might work, let's have that too.
By hobbling the RBNZ and forcing it into measures that are not as well or specifically targeted as they could be, this Government has made matters worse.
Whoever is in Government after September 23 needs to take proper responsibility for the housing issue. It is simply not something that can and should be left to the RBNZ to deal with alone.