It's all very well talking about removing loan to value lending limits, but we need to hear what the Government would do if house prices started to rise quickly again

By David Hargreaves

The big missing ingredient in Prime Minister Bill English's remarks about loan to value restrictions this week was what his Government would propose to do in the event that the housing market took off again.

And Labour leader Jacinda Ardern's comments on the same subject are not encouraging either.

Well, no, there is reference in English's comments to building more houses and infrastructure - effectively reiterating the past mantra of this Government of 'supply, supply, supply' and refusing to do anything to quell the demand side of the equation. Labour's answer is similar.

Okay, increasing supply - fantastic idea. But what about if the demand side of the equation needs dampening before the supply catches up? Well, this is where we've come from. And it's where we could head again very easily.

The big problem with the Government's approach during the past few years is that to this point it has not come close to meeting its housing supply targets in the crucial Auckland market.

Migration pressure

The changes this Government made to policies around migration, particularly the one that allowed students to work 20 hours a week, have aided and abetted the massive surge in net migration. The majority of people end up in Auckland. That's keeping the pressure on. The numbers of houses being built in Auckland are not matching the growth in the population of the city.

So, while the housing market has gone quiet at the moment, the Auckland market in particular remains under-supplied with houses, which means another demand-driven surge in prices could potentially happen at any time - particularly if the banks lift their current mood of caution and start turning on the tap again.

This Government has found out the hard way that you can't just jawbone the building of new houses - well not unless the Government itself puts our money where its mouth is and physically builds them on the state tab.

So, if you can't immediately fix the supply problem - what about the demand issue? What about that?

What if the market takes off again?

Both National and Labour are talking about the desirability of removing LVR restrictions - but what happens if these are removed and the house prices take off again? What would either party in Government actually do to curb the demand side of the housing market?

It's easy to see why the political parties like to talk about building new houses and infrastructure, because those are very positive things they can be seen to be doing.

Discouraging people from buying houses, or making it harder for them to do so - even if there is an intended public good in it - is very negative. It's a bad look. It loses votes.

It's a dirty job, so, it has been left to the RBNZ. And now the RBNZ is likely to get kicked in the teeth for attempting to do that job.

To refresh memories, the Reserve Bank introduced 'speed limits' on high loan to value ratio (LVR) lending in 2013. This was part of its new 'macro-prudential toolkit' agreed between the RBNZ Governor and Bill English in his then role as Minister of Finance.

Doing the Government's job

The RBNZ moved to do something about the demand side of the housing market in response to the fact that this Government WASN'T doing anything about it. Some subsequent Government measures, such as the bright-line test only came after the RBNZ had literally implored the Government to do something.

The RBNZ was trying to do a job the Government wasn't - and it seems still isn't - prepared to do.

The comments of both English and Ardern on LVRs this week matter because after the election the incoming Government will have to appoint a new RBNZ Governor.

The appointment process is interesting. Basically, the RBNZ board picks the candidate - but the Government gets to sign off on it. So, theoretically if the Government doesn't like the choice it can push back.

Will the board have the guts to front up to the new Government after the election with a candidate who is gungho about continued LVRs and indeed more macro-prudential tools? I don't know.

RBNZ independence

It was interesting that the worldwide advertisements for a new Governor did make explicit reference to the independence of the RBNZ.

Now, too much can be read into things but it did appear as if the board had awareness that independence is becoming an issue.

While both English and Ardern stressed this week that they would not look to interfere with the independence of the RBNZ, well, to be frank, they wouldn't need to if they ended up with a Governor that didn't push for things like macro-pru tools.

It's worth asking the question as to whether any potential Governors out there might have been put off by the political comments this week. Let's put it this way: They would have hardly been encouraged. 

Look, both National and Labour are right. In the very long term New Zealand and particularly its largest city need to build enough houses. Along with that there needs to be a coherent population policy that dovetails with housing and infrastructure requirements.

Grasp the nettle

But clearly some Government some time needs to grasp the nettle and produce some policies that can tackle and exert some influence on the demand side too. Don't pressure the RBNZ into stopping doing that particular job and then not replace it with anything.

The rules, taxes etc in New Zealand explicitly favour investment in housing over other investment classes.

So, essentially what's needed is some sensible measures that level the playing field. Everybody knows what the potential options are. It doesn't mean taxing the blazes out of people buying property - just trying to ensure that the investment classes as much as possible are treated the same.

Until such time as a New Zealand Government has tackled that imbalance in the New Zealand economy the country is always going to be more heavily exposed than it should be to a major property market downturn. Which is a worry.

Tackle the demand side of the housing market and the Government might just find it doesn't have to disagree with the RBNZ - because the RBNZ will not longer feel it needs to do the Government's job for it.

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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41 Comments

Here is a view as to what a reasonable and prudent central bank would do in regard to lifting LVR limits. A prudent central bank would only raise these limits if:
1) the price to income of houses is less than 6 in all major metropolitan centers, and
2) rental yields have returned to historical norms; and
3) the household debt to house income ratio reduces to below 1.6 (from the current 1.67)
As soon as all these have been demonstrated to be stable, then perhaps the LVR limits could be raised a little (but not much)

If, if , if , theres thousands of houses for sale in Auckland so how can there be a shortage of houses ,houses are simply to expensive and overseas investors brought the higher priced property and those people ether moved out of Auckland or brought 4 or 5 rentals, the people who sold cheaper houses moves to cheaper towns , end of that story, that's over, end of the boom, LVR would make no difference now if put back the way they were because prices have already started going down and most investors borrowed to much so there deposits are likely to already be under and banks are worried already, for decades governments and the RBNZ have tryed saving a falling market after a boom but we seem to always do the same approximate 3 to 7 years of decease, normal election dribble , the amount of buyers left in the market (mostly FHB) won't out way or afford the monstrous amount of houses for sale specially after the election, SUPPLY AND DEMAND, normal stuff really, its been happening forever

And to boot, young people who have the potential to earn a high salary know there are other places they can move to that offer a better salary-to-house-price ratio and a pretty good qualify of life, overall.

Yes even tho Tauranga is about 5th highest unaffordable city next to Auckland in the world if u earn good money you'd be better off, and prices are dropping

Or they can earn more money in Melbourne, where there will soon be an oversupply of housing. Or Brisbane, where there already is an oversupply.

Absolutely. It's a logical response. I did just that in the late 80s and returned 20 years later able to afford exactly where I wanted to live, mortgage free.

Anyone who knows economic will know Supply and demand both have to be tackled/balanced to solve the problem specially housing.

National cannot act on demand as will upset elite few here in NZ and many overseas friends whom they have promised in private that will give free access come what may so they can only talk about supply though it will take years to build houses and than too will be shortfall as demand will always outstrip the supply specially in Auckland.

This price rise is not because of supply alone but because of money laundering - money coming from overseas. FHB buyer even if they manage to find a deposit of $200000 - how many can service a loan of $800000.

National have been pandering to property investors / speculators both here and in China. Most politicians have investment houses.
It is no secret that the main reasons National want to flood the country with immigrants is to keep wages down and house prices up.
Property investors have done very well out of this Government at the expense of the less fortunate and will be voting National.
Under no circumstances do they want to control house prices. This is why English wants the RB to drop the LVRs. Real estate agents are now pretending to be concerned about first home buyers. They did not care one bit about FHB when the boom was on. They are now only concerned about their big commissions. If they were concerned they would reduce their huge commissions.
The RB would be foolish to drop the LVRS just because the Government is pressuring them

@O4 normal If what you are saying is true, then net migration to Auckland would be in-line with house building which it isnt. To point out the obvious failure of your argument: prices rose in line with broad demand, the 'responsible lending code' and LVR changes caused a dislocation in ability to buy, not desire. Fundamental broad demand sits below current prices because of policy changes, not demand changes.
Where do you get your data from to claim corrections last for 3 to 7 years?

What are the numbers of empty houses, how many Auckland houses are over full of people because they can't afford to buy with 10 cars out front, how many Aucklands have left, would you call the low house prices of 2008 to 2014 in nz other than Auckland a correction, a low, NOT the being of a boom, want would you call 1975 to 1981 where houses prices dropped each and every year for 7 years , a correction, or something else, there's information everywhere, bits and pieces, call it what you will, but Auckland in general is no different than all these other city's having large corrections because of overseas investors, not high immigration numbers with little money filling our rentals with half the city leaving because of high prices and turning the city into rentals houses, houses for sale will only grow, house selling will only drop because the only ones left are FHBers and teachers, doctors etc that are to small in number to keep these high prices up, overseas investors started it and ended it, and now FHBers get all the attention, JUST LIKE ALL CORRECTIONS , please don't answer my comments LAMINAR, I've read your comments before with bobster and misterB and others , you're like the little stubborn boy in the classroom with the lollies that you don't want to lose with bobster and misterB as your teacher

@O4 normal Corrections (the term you used) are pretty hefty downward movements. The generally rising prices after Jul 09 would not constitute a correction.
The fact you have to go back to the inflation adjusted change in value from 1975 to 1981 (stagflation) to defend your claim is more a criticism than support of your own point. We floated the dollar in 1985 to put this date in context.
Auckland's population is rising, underlying demand is strong, just not these prices combined with these lending conditions.

If prices start rising steeply again, then perhaps what should be done, is what should have been done years ago, ban bloody foreigners from buying them.

Love it

As per your article you say:- Migration pressure - The changes this Government made to policies around migration, particularly the one that allowed students to work 20 hours a week, have aided and abetted the massive surge in net migration

Even Simple-Simon and Blind-Freddy and Forrest Gump know how to fix that problem

Hopefully supporter and promoter of housing ponzi will not be relected.

Agreed. See speculator policies on the election ticker link.

"The rules, taxes etc in New Zealand explicitly favour investment in housing over other investment classes."

If the rules did that we wouldn't have a housing shortage. We have a housing shortage therefore there is no evidence that the rules "explicitly favour investment in housing".

Seriously, you came to that conclusion? Perhaps it should have read "The rules, taxes and demand creating a shortage etc in New Zealand explicitly favour investment in housing over other investment classes."

Most wealthy people I know who have investment properties tell me the main reason they invest in housing is to write off their taxes against their total income.
We are one of the few countries in the world that does have some sort of tax to control property investors
Their are plenty of houses but because of the tax system some people have multiple houses, thus depriving others from buying a single home.

Yes "The RBNZ was trying to do a job the Government wasn't" is true.... except it is not the job of the RBNZ to control house prices. Financial stability is their job, and despite Wheeler trying to control prices, that is not in the legislation or something they should do. With politicians (both local and national) is where the responsibility lies.

Isn't the housing market not financially stable , isn't massive dept there concern, if nz was and I'm not saying is going in a direction of the GFC they should do something?

The primary cause of the GFC was fraud and the failure of the EU to achieve fiscal Union, not personal debt levels.

What?! Wow.

I appreciate your view is that "there is no such thing as too much debt", but I think thats a bit more revisionism than I can really handle.

@bobster My personal view is not that there is no such thing as too much personal debt. That is the view of central bank DSGE models. Personally I actually do think that personal debt matters, that long term its critical in fact.
That doesnt change the fact that personal debt on its own would not have caused the GFC at that point.

America is always a few years ahead, this is what's coming for NZ.
http://www.zerohedge.com/news/2017-08-15/new-american-dream-rent-your-ho...

Question : If not LVR than what ?

Ans : Replace government (responsible) as election just a month away.

I think governmental experts should be expertly managing every aspect of our daily lives, people shouldn't make decisions without being told what to decide by accredited experts. Lack of control by experts is a major problem, and I will be voting for a labor government because they are advocating more controls and more experts!

I see that John Bolton is whinging and whining like a wounded Sciuridae, over on the NZ Herald, lamenting on what problems the LVRs are causing for a number of his clients, of which the number can only be heading due south. Truly the trough feeders all come out wallow in synchronicity showing their true colours, whether black or grey. Bottom line, mortgage brokers are making less money on commission and trail, hopefully the banks start to cut those margins to the bone, as mortgage brokers are front line when turnover falls. What is the point in having mortgage brokers if they cannot secure financing for their ill informed clients anyway.

Maybe the government are wanting DTI's instead?

They have openly stated that they do not want DTI's.

A lender and a borrower should be able to come to their own agreement

With all the RE agencies complaining of low sales and falling prices all the false confidence of the last year has gone from the media. You might expect to see prices tumble a bit quicker as sellers get cold feet

No its not a flattening or plateauing market, its correcting big time. Auckland 8% down since Feb, will be double figures soon then a freefall....

Pop

Not with things helping to pump them up such as high immigration inflow, and easy money from banks to buy. Banks seem pretty desperate at the moment to lend as they are reducing rates again. But if house buyers stand firm and resist buying, and see that houses are well in excess of what DTI would be, prices can fall.

institutional investors and hedge funds will start hoovering up all the houses before prices fall to a level where LVR restricted FHB's get a lookin. Look at blackrock in the USA after the GFC. look at p2p lending in NZ, kind of different but similar. Whenever there's "yield to be had", the hagfish of the finance world sniff out the dead caucus and start feeding. That is unless there's some government legislation prioritizing home ownership. I wont hold my breath.

just treat family home differently from the investment properties!
PRMARY RESIDENCE is a home. the rest should be difficult to buy and heavily taxed.

This Government has found out the hard way that you can't just jawbone the building of new houses - well not unless the Government itself puts our money where its mouth is and physically builds them on the state tab.

Freeing up housing supply is easy - simply open up some land supply to Auckland.

We are governed by the twinned twits of Phil Goff and Bill English who don't let this happen. These combination half wits have instead decided to waste $billions more opening up every town in the Auckland region (except Auckland City).

Get rid of the inept National government and Labour council land supply policies - crisis over.

Every post I read from you is a slightly reworded version of the same mantra. Are you a Bot? I'll test that by asking two questions:

1. Which land in Auckland City do you propose 'opening up'?

2. What is your interest in this outcome? Landowner? Developer? Activist?

1. Land that is closer to Auckland than Huapai, Warkworth, Wellsford and Pukekohe.
1A. The land South-East of Kumeu, because Auckland Council has decided only to open up identical type land North-West of Kumeu.
1B. The land adjacent to Swanson railway station.
1C. The Takanini-Ardmore plains.
1D. The large lots of Greenhithe.

2. Potential FHB with a job in Auckland and enough equity for a deposit. I think high land costs in Auckland make Auckland a second rate long term investment.

Interesting. I consider all of those areas being outside Auckland City. Another question: do you think opening those areas up would make a material difference in land cost given the way developers release products?

Yeah and I'd much prefer a world in which you were correct. Unfortunately there was this guy called Rodney Hide and so even if you "consider all of those areas being outside Auckland City" they aren't.

And yes.

.