David Hargreaves admits to reservations about the Reserve Bank move to lift the 'speed limit' for high loan to value house lending - and particularly the move to free up some of the shackles on investors

By David Hargreaves

Well, on the one hand, the move by the Reserve Bank to further loosen the limits on banks' house lending is logical enough.

But on the other... it is a risk.

It's clear enough though that under Governor Adrian Orr the RBNZ is more prepared to err on the side of letting the engine run a little hot (and that applies to the economy in general too, not just the housing market) than certainly his predecessor Graeme Wheeler.

Wheeler I think was undoubtedly too cautious by half. Does Orr go too far the other way?

Time will tell.

One interesting development from Wednesday's Financial Stability Report and accompanying press conference was the official recognition that even as the LVRs are loosened, so the RBNZ is now prepared to say they are going to be with us in one way or another, at times obtrusive or at times unnoticeable, for good.

The permanent-temporary measure

This is a departure from what was said when the measures were introduced in 2013 and frequently re-iterated by the central bank subsequently. The moves were clearly described as temporary, even though just about every economist and most writers - yours truly included - believed they would be with us for the duration.

When asked specifically by my colleague Jenée Tibshraeny whether the LVR speed limits were in fact here for good (after earlier giving an answer that indirectly suggested so), Orr replied: "Yes. Will they always be ‘on’?...To be determined."

So, in other words the situation is as economists have surmised. Orr's use of the word 'on' in describing of the status of the LVRs gives credence to the suggestion that the RBNZ would see a time when the LVRs are left in place but are made 'non-binding' on the banks, with the central bank then reserving its right to make them binding again. That means in other words, switch them off and then switch them back  'on' - as may be deemed necessary if fire breaks out in the housing market again.

What's also clear from the Wednesday press conference is that the RBNZ's keen to use other weapons in its armoury apart from the LVRs to keep the banks in sound financial order - with a move to force them to keep more capital being broadly signalled. 

Keeping more capital of course would impose its own limits on how much the banks could lend, so would have its own dampening effect on house lending.

It all sounds sensible enough.

However, to look at the specifics of the decision to loosen the LVRs, personally, I would have waited another six months.

By moving now with measures that will take effect on January 1 the RBNZ has certainly helped to give the summer housing market a lift. 

People can debate among themselves on this one, but I think the market was looking reasonably buoyant anyway as we head into summer - and this should help.

My concern would be what happens after summer and moving into next winter. And that's where I think the RBNZ, with its next Financial Stability Report due in May 2019, could have waited for six months.

Freeing the investors

And I think most contentious in Wednesday's announcement was the decision to loosen the shackles on the investors.

Just to clearly reiterate what the position will be, it is this:

From January 1, 2019 the banks will be able to advance 20% of new mortgage lending to owner-occupiers with deposits of less than 20% of the value of the house. That's a loosening from the current 15% limit figure, which itself was applied as of January this year, having earlier (2013) been set at just 10%.

For investors, they will now (from January 1, 2019) need 30% deposits, down from 35% as of January this year and 40% earlier (2016).

It was the blunderbuss effect of applying the 40% deposit rule in 2016 that really put the handbrake on the housing market, which at the time was looking uncontrollable. 

Whereas in mid-2016 the investors were accounting for around 35% of new mortgage borrowing, by the start of this year it had pulled back to only around 20%. Significantly over the same period, the first home buyers, who had arguably been crowded out of the market by the investors, were enjoying an increasing share of the borrowing, moving from single figure percentages to as high as 17.5% share of the market.

My question then really would be, why risk tipping that balance back again by loosening the rules further for the investors? 

Leave them be

As I said higher up this article, I wouldn't have made any adjustments to the LVR settings at all at the moment - but if you were going to do it, I would have said, okay, let's see how we go with more relaxation for the owner-occupiers and leave the investors at 35% deposits.

Is there in fact more concern among the RBNZ people than they are letting on that perhaps there might be a significant downturn in house prices without loosening the belts of the investors?

It is interesting to look at the latest monthly RBNZ mortgage figures by borrower type. The figures for October came out on Tuesday. Overall they look fairly solid, with some $5.527 billion advanced. That compares more than favourably with the $4.605 billion advanced in October 2017 - but remember that one was affected strongly by the election and the post-election coalition negotiations. A better comparison is with the October 2016 figure of $5.36 billion - although that was at the time that the 40% investor blunderbuss was starting to really hit.

Anyway, looking at the shares of the money in the latest month, the share of investor borrowing has actually dropped to a new low of 18.7%, and that's a sharp drop from over 21% in September. That does surprise me, given that the figures for the investors had been edging up this year. So, maybe the RBNZ knows a few things about what's going on and is reckoning that the investors maybe do need some encouragement.

In this regard, I was interested in the comments on the LVR moves on Wednesday from the country's biggest home lender ANZ. Antonia Watson, ANZ’s Managing Director Retail and Business Banking. She said what’s had most impact recently on the market was moving the 'bright line test' from two to five years.

Driving them out

"That’s driven a lot of capital gains speculators out of the market which has dampened house price inflation in places like Auckland."

Well, I would imagine that the bright line test, which remember, is the capital gains tax we have without apparently having a capital gains tax, would probably more apply to investors, since most owner-occupiers sure aren't that thrilled about moving house every couple of years.

This all being the case, maybe this move by the RBNZ will head off a big fall in the participation of investors.

Still, I think you can debate about what sorts of share of the market the various types of house owner should have. Certainly at over a third of houses going to investors, I thought that was too many. And the poor old FHBs were not getting a look in.

The October mortgage figures show FHB involvement still as quite strong, with 16.6% of the borrowing going to them.

The relaxation of the 'speed limit' on owner-occupier lending should be good for the FHBs and give even more of them a chance to get into the market. And remember those lucky enough to win Phil Twyford's KiwiBuild lotto are not even included in the LVR 'speed limit' calculations as new builds are exempt.

Giving a lift

This all boils down to the summer housing market looking buoyant. But my concern would be that this move by the RBNZ is going to give the market a lift it possibly didn't need and maybe we will get a short term surge in prices. Maybe the investors will perk up again and climb back in - which will increase the competition for houses, obviously.

The concern principally then is that some FHBs may be tempted to over-stretch themselves in the face of a post-LVR-relaxation mini-boom.

If we then get hit by an external shock as winter approaches next year and if the economy starts to slacken - and people lose jobs - and if maybe interest rates start to twitch upwards (though that's certainly not forecast), well, it might not be good.

What we do want is young people able to buy their own homes. What we don't want is those people to get hit by a market downturn in their early months of them owning their homes at a time when they are financially at their most vulnerable.

The RBNZ has made its decision. I hope it's the correct one.

I would have waited. 

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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21 Comments

I'm far more critical of this RBNZ decision than you appear to be, but let's give them the benefit of the doubt, as encapsulated in your "maybe the RBNZ knows a few things about what's going on and is reckoning that the investors maybe do need some encouragement."
What could that 'few things' be? Perhaps the abolition of Negative Gearing; a Party platform at the last election is closer than we know? Or Immigration is being scaled back with gusto, but we just aren't being told so?
Regardless, if there 'are a few things we don't know' to me, that's negligence on the part of the RBNZ If they 'know something', and aren't telling investors, then that's failing to keep the market informed, and I'd argue that compounds their mistake in moving, not now, but at all.

Its clearly just a move to keep ahead of the game and maintain stability. I personally thought stability meant they would sometimes let things drop ~10% but evidently stability actually means flat or rising but not really ever falling.

I lost confidence in the RBNZ when house prices were increasing by 25% a year. They sat on their backsides and just watched the social and economic damage being done. It was not until the market slowed down later that they decided to do something.
Instead of tinkering with LVRs, they (or the Government) should bring in a non owner occupied capital gains tax but exclude shares and non residential investments. The reason companies like Tegal and now Trade Me are being sold to overseas buyers is because NZers put their money into rental properties which does nothing for the economy and does not provide any extra housing. If rental properties were not rented out, they would be lived in and owned by families.

First-second stage response so far. At this point new credit is inflationary which will support nominal prices but not real.

My only concern is there is no real point in removing the LVRs as the market appears to be structural, this is all a cyclical response.

A song for the Guvnor this evening!

https://www.youtube.com/watch?v=H6SXi4I47Qw

This feels like the RBA move when they reduced stamp duty on fhb to stop the AU housing market from dropping previously.

The RBA has nothing to do with setting stamp duties in Australia. Stamp Duty is a state government tax, decided on by elected politicians.

Seems daft to me. Why not wait?

Also, shouldn’t they be trying to transition to a DTI ratio?

Exactly. Wait was the correct call. And no FHB mentions.
If he knows something we don't then that me very cautious indeed.
Mind you, it's a Labour Coalition, what did we expect.

"We don't want young people biting more than they can chew" looks a lot like "we don't want asset prices to be in a position where they might tail off or correct, so we'll give the investors more power to stoke the fire and prop up prices".

There's nothing in here for first home buyers - yes, you can get a mortgage approval, but you're once again competing with more and emboldened investors when there is still a massive supply shortage in places like Auckland.

The Reserve Bank may feel like they're protecting the integrity of the banking system as it stands here and now, but there seems to be little consideration of whether this is in the interests of anyone but a small group of already well-heeled Kiwis.

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Let’s think about this logically.

If the reserve bank changes the rules for investors the following benefits accrue:

• it’s easier for investors to buy houses with greater debt
• prices are higher than they otherwise would be
• investors perhaps build more houses (wasn’t there an exemption already?)

Costs:

• it’s harder for FHBs and others to buy homes
• more investors have higher leverage
• there is more mortgage debt in the economy
• there is less of an equity buffer on some investor loans
• housing costs go up increasing inflation.

Did I miss anything on either side?

I can’t see much benefit at all. The only thing perhaps is the building of new homes but that is marginal for me as I doubt the strength of the impact. The downsides are significant and several relate to the reserve bank’s dual mandates to maintain price stability and protect the banking system. Worse this kicks FHBs and other people wanting to buy homes in the guts. I hate how the landlord lobby mobilises the public against the LVRs and DTI ratios as if they penalise the wider public.

Hardly

You got my vote for the job as next Guvnor of the RBNZ.

@Hardly Using your system of analysis the logical conclusion is actually an investor ban, so you should probably just say that.

It’s not about banning anybody. It’s about managing systemic risk. Property investors pose a greater systemic risk than owner occupiers. Therefore the restrictions on them should be greater. In actual fact 40% may have been too high but now was not the time to pull back. If there is a correction the banking system will need that equity.

People need to realise that they can buy property as an investment there are just restrictions on leverage from a bank. Those restrictions protect everyone.

you forgot about one more cost, - it does not motivate those "investors" to go and work hard at everyday jobs like FHB have to, because the income tax is quite high compared to luxury of having tax-deductible interest payed to bank

I agree with you David.
I was somewhat surprised as I thought that we wouldn't see any loosening of the LVRs until such time as the current state of the housing market was looking a little more suspect. I think that at the moment the housing market is holding up surprising well, with continuing low interest rates as a driver, historically high levels of immigration at least a driver for Auckland, and many of the regions positive still being in or just come off catch-up mode.
Prices held up well over the winter and there was some spring in the spring market albeit still a little subdued.
Given the RBNZ statement that there is risk to those highly mortgaged, I wouldn't have thought that RBNZ would want to loosen up, see increasing house prices, and higher interest rates, and therefore exposing those with limited equity to that risk.
When I read of the loosening I wondered if RBNZ had some modelling evidence that there is some sort of fairly imminent specific risk factor or downside to the market (other than the biggies that continue to be present).
Or maybe they are just trying to get more FHB into their own homes, and investors back into the market to meet a tightness in the rental market.
I wait with interest to see what eventuates but I still see a stable housing market in the short term while interest rates and immigration rates both remain at their current levels.

House prices in Auckland are extreme for what you get. There are dated units in suburbs surrounding the inner city selling for around a million dollars.

For a FHB to take on anywhere near that kind of debt they'd need quite the income - which some do have. Yet they'll still just have a dated unit, which could easily plummet in value because .. it's a dated unit!

The less of a deposit required, the higher the repayments too. Auckland is just going to become unlivable - rubbish truck drivers, city care workers, painters, etc won't be able to afford to live. Poverty and its' cousin crime will grow.

If housing supply ramps up, or vacant homes hit the market en masse, well then, house prices will decrease. The FHBs that brought those dated units for a million dollars each, they'll become mortgage prisoners because nobody will pay more than $500,000 for them now. Their lines of credit will be shot.

But current property owners don't want to hear this, they believe their properties are worth the CV, and they're right, until they're wrong!

So unless you are an extremely wealthy FHB, unfazed by potential capital depreciation of hundreds of thousands of dollars .. there really is little incentive for you to saddle yourself up with massive amounts of debt - at least not in Auckland and not for a small, dated unit. It's simply not worth the risk.

Heh. As the Boomers start dropping off we need people to consume their houses at the prices they demand. If first home buyers can’t muster up the required deposit, have them rent the property off someone who can from recycled equity.

that is the thing , for some reason some people believe FHB are happy to get into rotten sh$t-hole in remote outskirts of Auckland for ~800k and will enjoy living in it for 20-30 years. They don't actually need the opportunity to get into more dept , they just need a bit more affordable and decent properties. and yes, that would mean some "investors" would be crying but that is the whole point of investing/not investing - the risk.
I believe eventually NZD will just be de-evaluated leaving investors happy and making all NZ population pay for this happiness via inflation.

Owner occupiers generally pose more of a risk to abanks than investors, although many on here will disagree!
If an owner/ occupier losers their job they need another job to pay the mortgage!
They stil have their living costs!
An investor always have the ability to continue to receive rental income plus they can always sell their asset
!
I would personally lend money to an investor with a decent rental portfolio over an owner occupier as I consider them to be a far better proposition generally!

The brilliance of this argument is astounding! Owner/occupiers are soooo risky!!
After all, renters never lose jobs!
And investors can sell their asset, but owner/occupiers never sell anything!!
And in a downturn, sure, investors are left far more exposed on multiple properties on a DTI measure than owner/occupiers, but who cares about all that logic, cos INVESTORS!!!
And !exclamation marks! make things more true!!!