sign uplog in
Want to go ad-free? Find out how, here.

A lift in housing activity could help to give the economy 'a bit of a kick', ANZ economists say

A lift in housing activity could help to give the economy 'a bit of a kick', ANZ economists say

ANZ economists believe the Reserve Bank is likely to announce a "small loosening" of its loan to value ratio (LVR) restrictions next month.

The RBNZ will be reviewing the LVR restrictions, in place since 2013, in its next Financial Stability Report (FSR) to be released on November 27. The RBNZ has previously loosened the LVR restrictions at November FSR announcements in both 2017 and 2018.

In the ANZ's latest Property Focus publication, ANZ chief economist Sharon Zollner, senior economist Miles Workman and economic statistician Kyle Uerata have had a detailed examination of the LVR regime, its impacts and where things may go from here.

They say that in looking at whether to loosen the LVRs there are a lot of "moving parts" to consider with the housing market.

"Both we and the RBNZ expect house price inflation to remain modest relative to previous cycles over the next few years, but frankly, a wide range of outcomes is plausible given the recent drop in mortgage rates, possible developments in credit availability, the softening economy, and policy changes."

A case to be made either way

The say that "in the end", a case could be made either to loosen LVR restrictions next month or wait and see where things sit after the dust settles following recent mortgage rate moves.

"But if we had to make a call either way, we think a small loosening is more likely. In the worst case scenario the RBNZ could naturally change course – the May 2020 FSR would be the next obvious opportunity. But no doubt they’d rather get it right first time. Wouldn’t we all, but with everything that’s going on, anyone who tells you they know with great confidence where the housing market is headed over the next 12 months may not be an entirely disinterested observer."

If the RBNZ does decide to loosen, the economists say, they don’t expect this to have a significant impact on house price inflation. But it could result in higher household leverage, "so ‘easy does it’ is the likely approach from here".

The ANZ economists are forecasting annual house price inflation will pick up to a little under 4.5% by mid-2020, but will then moderate to average around 3% over the next couple of years. In the latest Monetary Policy Statement in August, the RBNZ was also forecasting relatively subdued house price inflation in the years ahead.

'Risks on both sides'

"But it’s fair to say our and the RBNZ’s forecasts appear to be some of the more temperate views out there, and we acknowledge there are risks on both sides to this view. Indeed, there are a number of offsetting forces at play in the housing market at present to account for, and it is far from certain which side will win."

The economists say the "number of moving parts" means it would be too simplistic to look at what happened following past LVR loosening to gauge how much a small easing in LVR restrictions will bump up house prices.

"It’s fair to say there is perhaps a little more uncertainty than is typically the case for the housing market outlook more broadly. Perhaps the path of least regrets for the RBNZ on pure financial stability grounds is to hold the LVRs steady until after the dust settles and it’s a little clearer how all of the above is netting out.

"...But on the other hand, a bit of housing strength wouldn’t go amiss in helping the RBNZ get the economy’s animal spirits going again, and helping get CPI inflation back up to the midpoint of the target band. Must be tempting to give it a little more rein."

The economists say that from a broader economic perspective, the housing market matters – a lot.

'A bit of a kick'

"A lift in housing activity and prices is likely to spur a little more consumption and residential investment spending, and possibly keep household sentiment buoyed (amongst those who own a house, at least – not so much for millennials). And based on the forward-looking growth indicators we’re monitoring, it looks like the economy could use a bit of a kick."

They say that LVR restrictions have likely eroded the ability of lower interest rates to stimulate economic activity.

"That’s just one manifestation of the trade-offs between financial stability policy and monetary policy that have become more acute as debt levels have increased – and that’s a global phenomenon.

"On the one hand, the RBNZ wants to stimulate economic activity to ensure it meets its inflation and employment objectives ('wake up, go and spend' was the instruction at the August Monetary Policy Statement press conference). But on the other it is mandated to make sure this stimulus doesn’t come at a cost to the stability of the financial system (“a material portion of New Zealand households… have high debt levels” was the warning at the May FSR)."

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.



Go for it, RBNZ! And let's see what happens....

My view? If you think NZ households are pulling their spending heads in now, just wait and see how much they spend when they have no disposable income left at all. Dragging in the Marginal Buyers is often the last gasp of a strung-out economy.
"** NZ's household debt levels are reaching terrifying heights"+ "If the RBNZ does decide to loosen... it could result in higher household leverage"= "the worst case scenario .."

Dragging in the Marginal Buyers is often the last gasp of a strung-out economy.

Yep. Drinking at the Last Chance Saloon.

I suppose the ANZ economist meant loosening LVR should give the economy a 'kick in the nuts'.
These banks have vested interest only in enlarging their loan books to increase profitability with little regard to long-term economic sustainability of the nation.

“Freehold” doesn’t mean that the property has no debt owing!!!!!!!
“Freehold” is a state of Tenure!!!
Most property is “Freehold” unless it is leasehold!!!!!
If there is no debt owing on a property the term is “unencumbered”
You would think that the writer would be able to get that terminology right!

Correct. This here folks is the most intelligent post I've seen on this site from The Man 2.

"On the one hand, the RBNZ wants to stimulate economic activity to ensure it meets its inflation and employment objectives ('wake up, go and spend' was the instruction at the August Monetary Policy Statement press conference). But on the other it is mandated to make sure this stimulus doesn’t come at a cost to the stability of the financial system (“a material portion of New Zealand households… have high debt levels” was the warning at the May FSR)."

Serial rate-cuts destroy the wage fund
Suppose you are a worker taking home $50,000 a year in wages. When your income-flow is capitalized at the current rate of interest of, say, 5 percent, you arrive at the figure of $1,000,000. The sum of one million dollars or its equivalent in physical capital must exist somewhere, in some form, the yield of which will continue paying your wages. Capital has been accumulated and turned into plant and equipment to support you at work. Part of your employer’s capital is the wage fund that backs your employment. Assuming, of course, that no one is allowed to tamper with the rate of interest.

Suppose for the sake of argument that the rate of interest is cut in half to 2½ percent. Nothing could be clearer than the fact that the $1,000,000 wage fund is no longer adequate to support your payroll, as its annual yield has been reduced to $25,000. This can be described by saying that every time the rate of interest is cut by half, capital is being destroyed, wiping out half of the wage fund. Unless compensation is made by adding more capital, your employment is no longer supported by a full slate of capital as before. Since productivity is nothing but the result of combining labor and capital, the productivity of your job has been impaired. You are in danger of being laid off ― or forced to take a wage cut of $25,000. Link

The RBNZ has cut the OCR in half three times since July 2008.

That 'article' (gold propaganda) linked is incorrect on a number of crucial factors. In order to justify your income you do not need capital sufficient to pay a salary. The human body is itself capable of generating value. You can take clay and fashion a pot. The turning wheel need not be worth 20 times the value of the annual profit from selling the pots. Capital is a stock. Profit comes from flows. So you need only have sufficient stock to buffer a flow capable of providing the income. The stock can be a fraction of the total cumulative value of the flows over a year.
In effect, a 50k income can simply imply that the human body is worth 1,000,000. When you cut the rate of interest by half, it implies that the human body is now worth 2,000,000.

Look at it from the liability side - i.e. the entity that is charged with paying out the wages (cash flows/accrual accounting)

The side paying the wage also doesn't need capital equal to 20 times the wages paid out because the human hired brings his own capital in the form of his body and mind. Think of a simple car repair shop that pays 3 guys 50k. Is the shop worth 3 million, nope. The article is complete bunk as most gold propaganda is. It massively conflates stocks and flows and doesn't understand how the two interact. Lastly, it fails to take in to account the value of the human as a unit of capital, causing them to completely misconstrue the economy. In most instances, an interest rate cut simply means humans and businesses have a higher capital value, such that the wages paid actually remain the same.

Unfortunately, that's not how the majority account for their financial actions and worth:

In March 2017, former Treasury and Federal Reserve (Fed) official, Peter R. Fisher, delivered a speech at the Grant’s Interest Rate Observer Spring Conference entitled Undoing Extraordinary Monetary Policy.

Wealth effect or wealth illusion? The other therapeutic effect of lower-for-longer interest rates is the wealth effect. By driving up the value of future cash flows with lower rates of interest, all manner of assets – stock, bonds, and houses – increase in value and, thereby, can stimulate our marginal propensity to consume. More simply put, the imperative was to make rich people richer so as to encourage their consumption. It is not so hard to imagine negative side effects.

There are the obvious distributional effects between those who have assets and those who do not. Returning house prices in California to their 2005 levels may be good for those who own them, but what of those who don’t?

There are also harder-to-observe distributional consequences that flow from the impact of lower-for-longer interest rates on the value of our liabilities. This is most easily observed in pension funds.

Consider two pension funds, one with a positive funding ratio and one with a negative funding ratio. When we create a wealth effect on the asset side of their balance sheets we also drive up the value of their liabilities. Lower long-term interest rates increase the value of all future cash flows – both positive and negative. Other things being equal, each pension fund will end up approximately where they started, only more so.

The same is true for households but is much more ominous, given the inequality of wealth with which we began the experiment. Consider two households: one with savings and one without savings. Consider also not just their legally-defined liabilities, like mortgages and auto-loans, but also their future consumption expenditures, their liability to feed and clothe themselves in the future.

When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures.

But just because we don’t trade our future consumption expenditures on the stock exchange does not mean that the conventions of finance do not apply. The family with savings likely ends up where they started, once we consider the necessity of revaluing their liabilities. They may more readily perceive a wealth effect but, ultimately, there is only a wealth illusion.

But what happened to the family without savings? There were no assets to go up in the value, so there is no wealth effect – real or perceived. But the value of their future consumption expenditures did go up in value. The present value of their current and expected standard of living went up but without a corresponding and offsetting increase in assets, because they don’t have any. There was no wealth effect, not even a wealth illusion, just a cruel hoax.

He is arguaing that rate cuts favour the asset owners and thats not in dispute, i can myself prove that is the case and have done so mathmatically on this site many times before.

In most instances, an interest rate cut simply means humans and businesses have a higher capital value, such that the wages paid actually remain the same.

No less, the present value of the cash flow of wages is increased by the rate cut, penalizing wage earners indiscriminately. In our conception the cash flow of wages comes about as a result of bargaining whereby the wage earner purchases the cash flow of wages against the delivery of his labor. The purchase price of the cash flow has just been increased by the cut in interest rates. There is no adjustment on labor's side of the bargain: the wage earner is supposed to deliver as before.Link

That statement is incorrect/incomplete, the wage earner must borrow to stay abreast, he does not have to work harder. Rate cuts magnify the return from owning assets. His same wage can now borrow more. If however, he does not borrow, then he will fall behind. He can, however, borrow by proxy through investments in companies that borrow. Or he can buy property and benefit directly from the lower rates. Neither of these articles is defending the gold article. Rate cuts do not directly destroy capital, they do rebalance capital to asset owners/borrowers though.


It doesn't make sense to loosen LVRs while at the same time increasing capital requirements - the purpose of which are to guard against any public money being used in a bail out.

Given the sky high prices and slowing down of the real economy and complete absence of wage inflation allowing people to stretch even further to borrow simply to prop up house prices would be remarkably short sighted.

Let's see Adrian Orr instead limit borrowing by implementing a 5x earnings limit and sticking to the 20% deposit requirement.

Lwts see house prices revert to genuinely affordable levels not allow the credit bubble to continue to grow.

But the LVRs were put in place to prevent New Zealanders from competing with well capitalised Chinese who were hyperinflating Auckland realestate. Perhaps the Hong Kong residents will find a way around the FBB and the LVR’s can stay in place?

Scrape that barrel

Still more money out there, pull them in....


..yeah that'll help i'm sure. We can relax now, the housing market is saved. I knew it was different this time.

The process of loosening the LVR is similar to feathering the propeller of a helicopter when the engine suddenly cut out. it will go down with a heavy thump regardless!


Translation: We (ANZ) don't really see much else on the horizon and don't have any options besides the continuation of bubble economics.

I wonder if Mr Key is still at ANZ?

You know that the NZ economy is totally poked where the resounding noise coming these "economists" is for the RBNZ to continue propping up the housing bubble to "stimulate" the economy. Surely even the property spruikers that infest this site can't see this as a sustainable long term option to ensure the NZ economy does not wind up as dead and buried as the EU and Japan.

You can't have a successful economy built solely on selling houses to one another (and to the chinese) at ever increasing prices.

Japan still has industrial clout, despite the lagging effects of the burst bubble. Imagine how wrecked the place would be without their productive output and knowledge base. Australia and NZ seem to be convinced that immigration is a far easier option than producing things.

"Surely even the property spruikers that infest this site can't see this as a sustainable long term option" - you will be surprised...

They simply don't care beyond their self interest. That's very evident.

Welcome to the wonderful world of "Soft Lending". I guess they finally figured out that just having falling interest rates isn't enough to keep the housing market buoyant, so we're now having to traverse the slippery path of loosening LVR restrictions (Soft lending). Next up GFC2.

Clearly the bulls and banks will want this. Allowing more accessible cheap debt/leverage into our housing market for investors to leverage further would be a big mistake.

House prices remain out of wack with incomes. Incomes are being forced up (teachers, living wage etc) but this changes, an other wage inflation cannot alone cannot re-trim the property/income imbalance. Some serious questions here. Do we want to continue to pump most of kiwis financial productivity towards overseas owned banks, and by proxy their shareholders? Do we want massive inflation everywhere destroying the value of retirement savings? Are we destined to become Zimbabwe?

If the answer is yes to all three the by all means go right ahead. My 5c..leave this alone, bring in the bank equity changes, and bring in Debt to Income limits.

Perhaps we should be asking the bods at the reserve bank to adjust their votes to counter the special interests they have. I suspect they are all homeowners. Being an interested party warps your thinking in ways you are unaware of.

Why would encouraging people to borrow more stimulate anything other than the growth of credit in the banks. Has anyone seen the massive increase in the banks speculate activity in the derivatives markets? It is massive, and more worrying they no longer have to declare this activity on their balance sheets.

Nonsense! The only way to improve economic activity is by leaving money available to families so they can spend, that means less spend in housing and more in productive economy. This stunt is just another desperate attempt at keeping the bubble from bursting, which is happening already.

Reminds me of a ditty I learned as a child ....."Come in to my parlour ,said the spider to the fly, it's the prettiest little parlour you ever would espy"

Banks like more debt.
Taking longer to pay back
What is problem: demand deficit.
Why do we have demand deficit: wages too low to buy stuff like housing based on savings for last 25 years, so debt financed. Wages as a % of National Income been falling in OECD countries since 1976 roughly.
People cannot take on more debt and don't want to.
Cuts to interest rates not working any more.

I'm in my mid-30's - wife and I are Auckland professional set.
All our friends are professional set (lawyers, accountants, doctors, investment bankers).

This is exactly what is happening.
No one wants to buy into this madness and take on any more debt.

Friends who purchased in 2015-2017 simply have no ability to step up to the next rung on the ladder because they have had no capital appreciation in that time.
Despite being on massive wages, they haven't been able to save nearly enough to step up because they have been so busy servicing what they bought.

Others who are well set (professionals, senior execs) have been discussing selling up for something smaller (even with young families) because they simply don't want to be so heavily leveraged any more.

This madness is coming to an abrupt end because there is no new generation of willing mugs.

LVR has not altered in last 12m
Interest rates are lower than 12m ago. Prices marginally lower.
FHB apartments priced $250-600k in Auckland sales are 28% lower in 12m to end of August.
So, seems little correspondence.
Last 12m deterioration in sales is not due to LVR but due to draining of confidence in market in mindset of buyers. Plus, mortgage lending flat year on year.
Money supply being hit by drop in sales (and lending?) on property over $2m, especially in Albany Ward and N Shore and central Auckland. LVR and interest cuts will not impact I am afraid.
Sales in may-Aug in 2018 rose. In May-aug 2019 they fell, in Auckland.
20% fewer OTM and fewer sales.
Fewer buyers and sales will mean lower prices after February

Mike, what's your reasoning for suggesting lower prices "after February"? Is it based on taking stock after the summer selling season, or something else?

The key phrase in the article is the bald admission that

.. a bit of housing strength wouldn’t go amiss in helping the RBNZ get the economy’s animal spirits going again..

Futzing around with LVR factors isn't gonna make many Animals much more Spirited. It merely smacks of desperation.....

Man, we've been doing this type of "kicking" for ages now. We've even done a really hard "kick" between 2014 and 2017. But why is this economy still not performing well?

Yearly capital outflows (profits) from 4 big multi-national banks and various other multi-national corporates?

Who benefits the most when LVR is lowered? There's much to learn from across the Tasman.