Things can move pretty quickly in the housing market.
It was only about a week and a half ago that yours truly was still confidently stating that I thought the Reserve Bank would further relax the loan to value ratio (LVR) limits for bank lending when releasing its six-monthly Financial Stability Report on Wednesday.
But the housing market data that has been more recently forthcoming for the month of October has painted a picture of an awakening giant. And some bank economists that had earlier expected the RBNZ to relax the LVRs had changed their minds ahead of the decision.
I had earlier thought that the RBNZ might be prepared to let the housing market run 'a little hot' for a while to give a little stimulus to the economy. The trouble is, with houses, a 'little hot' can become a 'lot hot' in no time at all. Obviously the RBNZ was not prepared to take the risk.
The RBNZ will have very much noted the very sharp rise in house price expectations in its latest household inflation expectation survey released on November 20, while the October monthly mortgage figures, released on Tuesday also painted the picture of a market very much perking up.
A big month for mortgages
As far as I can see, in dollar terms, the $6 billion advanced by the banks in October might have been the most ever for an October month. Of course $6 billion gets you a lot less house (particularly in Auckland) than it once did, so you would expect the figures to be bigger.
But if we go back to the years 2013-2015, when the housing market was really flying, we can see that in October 2013 there was $4.6 billion advanced, October 2014, $4.9 billion and October 2015, $5.9 billion. The $6 billion borrowed in October 2019 was only the second time this year the $6 billion mark had been breached (the other time was in May).
Clearly the 75 basis points of cuts the RBNZ has made this year to the Official Cash Rate between May and August, taking it down to 1%, are starting to have a real impact. And remember there was a loosening of the LVR limits that was applied from January this year too, which will have been stimulatory.
I wouldn't be surprised if the RBNZ hasn't been somewhat taken aback by how quickly housing sentiment seems to have shifted.
RBNZ changes course
It was only in May, in its previous Financial Stability Report, that the RBNZ said this:
"If household lending risks continue to fall gradually, LVR restrictions will continue to be steadily eased. That will require household lending and house price growth to remain at sustainable levels, and banks to maintain prudent lending standards. We expect to review LVR restrictions every six months, unless conditions change suddenly." (Bold type is mine for emphasis).
Compare that with this comment in the November FSR released on Wednesday:
"...Given the uncertainty around the future trend in housing lending risk, it would not be appropriate to ease LVR restrictions further at this point. We will continue to review LVR restrictions, and will adjust them in line with changes in the overall risk environment."
All reference to the restrictions continuing to be "steadily eased" has gone. Indeed you could read that sentence as leaving the door open for an actual increase in the LVR limits, should the need arise.
With the recently emerging signs of life in the housing market it would have been really risking pouring petrol on the market to relax the LVRs further at this stage.
And the way the market has perked up, it's now very difficult to see the RBNZ giving consideration to further relaxation of the LVRs in its next Financial Stability Report in May 2020. It will want to see how the housing market goes through the complete summer season.
No change for a year
So, the earliest point a which the LVRs might now be relaxed again would likely not be till November 2020.
But a lot of other things will have happened by then and it might no longer be as relevant.
One thing that will be worth keeping an eye on in coming months is the new data series the RBNZ has started compiling looking at lending by debt-to-income.
To be honest I think this series could be improved in terms of how the data is presented, to make it more readily accessible.
At the moment, in order to track changes from month to month, certainly I've found it necessary to add figures up and then calculate percentages in order to attempt to paint some kind of picture that isn't clear from the raw data.
I've only looked closely at the first home buyer figures, since I would take the FHBs to be the most vulnerable buyers. The data goes back to 2017. The general pattern since 2017 has been of DTIs on mortgages gradually easing back from very high levels.
A spike for FHBs
However, looking at mortgage money advanced to FHBs on high DTIs - that's over five times income - there was a notable spike in September.
Across the country as a whole the amount of money borrowed by FHBs on a DTI of over five rose from 31.9% of the total borrowed in August to 35.5% of the total borrowed in September, which was the highest percentage figure in two years. And bearing in mind those figures have been pretty high anyway.
In terms of the pricey Auckland market, DTIs have generally been falling from very high levels, but again in September the percentage of over five DTI money advanced to FHBs lifted sharply from 47.8% in August to 51.3%, which is the highest percentage since November 2017.
We will have to wait and see over coming months whether this spike in the DTIs subsides, but maybe not. It would have been a further warning sign for the RBNZ.
And those DTI levels will want watching in the months ahead.
Bring on the DTIs
The RBNZ reaffirmed at the media briefing after the release of the FSR that it has not given up on the idea of some kind of DTI-related measure in its 'macro-prudential toolkit' alongside such other measures as the LVRs. This subject has now been put into the considerations for the second part of the Reserve Bank Act review that's currently well under way.
The absence of some sort of income-related measure from the range of macro-prudential tools agreed to with the Government in 2013 has looked over time to be an ever-more glaring omission.
It is to be hoped the Government does now look favourably on the idea and that we do see some sort of DTI measure included in the macro-prudential toolkit.
Presumably at that point the RBNZ might then feel comfortable with 'switching off' the LVRs.
In the meantime it will be interesting to see what does happen in the housing market over summer and whether the early signs of life turn into a full-blown rising market again or not.