Labour would look at allowing RBNZ to control mortgage loan to value ratios to curb price pressures, leader Goff says

Labour would look at allowing RBNZ to control mortgage loan to value ratios to curb price pressures, leader Goff says

Government needs to look at new tools for the Reserve Bank to use for controlling inflationary pressures, such as regulating loan to value (LVR) ratios, Labour Party leader Phil Goff said in a speech today.

Goff was speaking to the Employers and Manufacturers NZ Manufacturers and Exporters Association in Christchurch about a pending skilled labour shortage and government responses to the Christchurch rebuild and a sluggish economy.

He was also speaking as banks have ramped up their mortgage lending in recent weeks and have loosened their lending criteria to allow up to 95% loan to value ratios in some cases.

"We cannot afford to damage our export and productive sectors by policies which promote inflationary housing booms which in turn push up interest and exchange rates," Goff said.

"That requires leveling the playing field in terms of not creating tax advantages for property investment over the export economy. It means widening the objectives of the Reserve Bank," he said.

"We need to look at other tools for the Reserve Bank such as regulating the capital to lending ratios to curb inflationary pressure and not just for prudential supervision."

Consensus

Goff's comments come a week after Finance Minister Bill English signalled he was satisfied the Reserve Bank was looking at additional monetary policy tools, such as regulating LVRs, to control price bubbles.

“We don’t want to see a repeat of the 2000s with excessive property speculation. I don’t think that either domestic or overseas banks are going to allow that to happen, because they’ve had a near death experience themselves, and they’d be reckless to go out and lend strongly against property speculation,” English said last week.

“I think you’ll find that the regulators like the Reserve Bank are keen to make sure that they reduce that prospect as well,” English said.

“The Reserve Bank is a bit ahead of the international pack, it’s been thinking through the issues of what they call macro-prudential regulation, which is, to deal precisely with property cycles that disrupt the macro economy, and they’ve disrupted it pretty severely in this last round,” he said.

“I’m satisfied they are, by international standards, well ahead of most regulators in thinking through how to handle property cycles, and asset [price] cycles.”

Reserve Bank Governor Alan Bollard said last month the central bank had identified several macro-prudential tools such as loan-to-value ratio restrictions and counter-cyclical capital buffers it would consider using, potentially in tandem, to moderate a future overheating credit boom.

See more on Bollard's comments in Gareth Vaughan's article here.

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63 Comments

If you're not allowed to build new houses and the population is increasing then of course prices will go up.

Now these twits are proposing that you're not allowed to build them OR buy them to control prices.  

Have they ever considered the simple notion of doing something about the RMA and District Plans that has largely caused this situation? 

Actually too much credit was the problem aka easy money whisked up from nowhere with nice fees and bonus payments with lashings of insider trading.

Low interest rates of the present, do nothing to clear out the malinvestments of the past 10 years, its akin to pouring petrol on a fire...

Texas has a 80% loan to deposit rate and this would seem to have stopped or been part of the reason that state didnt have wild speculation and a property bubble as bad as others....

Steve Keen also suggested it could be useful to control as wel I think..

regards

yep Texas' LVR controls plus more liberal planning controls have been fundamental to the avoidance of a housing bubble and subsequent crash

Adopting similar policies in NZ now will limit the formation of further bubbles, but won't undo the damage that could have been prevented by sound government policy in the early / mid 2000s 

Owen McShane wrote of the bubble-making properties of overly restrictive planning rules in the mid 1990s so its not as if this fact wasn't known

At the moment Im not convinced planning is responsible....when I look at the UK I see them taking out green field breaks etc....I came here for the quality of life....

The biggest thing I think was too cheap credit....

regards

Steven

there is near consensus across economists of all political persuasions that restrictive planning and building controls are a factor in high housing prices. And if you've ever tried to build a house in NZ you will know that it is a far more difficult than it should be

I think the only real question mark is how great planning's role has been in creating bubbles. I personally think it has a significant role, although on a continuum of extreme views with the planning professional apologists at one end who seem to refuse to acknowledge that planning might have any influence whatsover, and Demographia at the other who see planning as being almost exclusively responsible for bubbles, I would be somewhere in the middle

Cheap credit of course was a big factor too, as well as a range of other factors (taxation policies, demographics, immigration policy etc) 

So you're not convinced town planning is responsible because you "came here for the quality of life" and consider that changes to town planning may may threaten that...

...therefore you consider cheap credit is the biggest cause of out of control house prices because the solution is more palatable to you.

I suggest you start reading the District Plan (for example PM 2 in the central area that doubled the price of CBD apartments overnight in 2006 -  none have been built since), get yourself a nice NIMBY tee-shirt and make a submission on the new plan.  

1st para, yes....it will.

No, I consider cheap credit the main cause, plus lack of lending constraint by the banks, therefore they need to be limited via regulation on the deposit to loan ratio, generally no more than 80%, but the RB would be allowed to vary that as an extra tool to use with the OCR.

I dont mind development for the right reason....

regards

lol - sounds like Bernard Hickeys arguements - high house prices are caused by everything except supply/demand, because if it was supply/demand and something was done about it Auckland may not look like a provincial town anymore.

Having low density suburbia right up to the CBD boundary might be great for your "quality of life" (plenty of room to drive the kids to school in the Pajero), but makes housing expensive.  Still the new plan will be out at the end of the year and it's proposing all sorts of stuff you're gonna hate (but will provide more affordable housing).

If ppl want a condensed city they can go live in the UK, or OZ where they have the same issues....ie over-pricing, excpet they have infilled (UK anyway) for decades..

Pajero, no, drive kids to school, no...public transport, walk, bike, yes.

...hate is a way strong word....I dislike things like idiots....I dont hate them.

regards

Or conversley if you want to live in a provincial town go and live in a provincial town.

That's right Matt in Auck...the combination of LVR limits and liberalised planning rules are key solutions to unaffordable housing...

I believe National are making progress on planning rules with RMA Phase 2 on it's way, but it is happening too slow, they need to push it along.

Also Bill English has been making some good noises about LVR limits, but it's not enough to rely on the Reserve Bank to use LVR limits, it's too subjective...they need to pass legislation that makes LVR limits one of their main targets, similar to how they work to the inflation targets...if no legislation is passed, then each time it will be a judgment call for the RB Governor...not ideal.

Ricardo - agreed

All hope is not lost, National are making some of the right noises, its just not really urgent enough

The best example of this is the Productivity commission study into affordable housing.....how many f$%%ing surdies on housing affordbality do we need! the evidence is clear and well substantiated 

I think the RB governor is better placed than a Pollie....especially from a pollies point of view.

regards

you are contradicting yourself. Requiring a bigger deposit will suck out speculative investor demand. The dampening effect of restircting LVR on house prices will avoid the early / mid 2000s scenario where potential FHBs would be continuously chasing their tails as they saved but never made any ground on a deposit because house prices kept skyrocketing.

Here's some scenarios for you to hopefully let you understand  

Scenario 1 adopt restrictions on LVR (and supply side policies)

In 2011 James is a fresh graduate. Able to save $15,000 per year on average in the first 7 years of his career, he has saved $100K (rounded from 105K) after 7 years,  allowing him to put down a 20% deposit on a property in 2018 that is worth 500K. In 2011 the same property was worth $430K, but due to a range of market and policy factors including LVR restrictions its value appreciation was limited

Scenario 2 don't adopt restrictions on LVR (and other policies)    

In 2011 James is a fresh graduate. Able to save $15,000 per year on average in the first 7 years of his career, he has saved $100K (rounded from 105K) after 7 years. However the property he wants to buy in 2018 is worth 650K. In 2011 the same property was worth $430K. The deposit of 100K on the value of 650K is simply insufficient for him to afford the weekly mortgage repayments, even with considering bringing in tenants

Get it?

See my post further down.  LVR's are intended to limit borrowing and will not affect prices directly.  It will require a combination of factors incl LVR's to directly affect prices.

I think PI's could do more to help the issue.  Instead of gloating about increasing rent's etc and their astute investment strategies how about they start doing something productive and actually build additional rental properties instead of purchasing existing housing stock.  They could then contribute to GDP and the overall economy, alleviate supply issues and at the same time provide a social benefit.

in my example James will rent for a period regardless of the existence or otherwise of the LVR. In fact with the LVR (plus other things like more liberal planning) he will be more likely to be able to buy a house as opposed to rent forever

but when he has saved his 100K he will:

1. be in a position to service a mortgage because house prices haven't boomed like they might have otherwise done 

2. be in a much more secure financial position having a larger deposit

rather than make ill informed comments you'd be better to do your homework and look at real life exampales like Texas where LVR restrictions plus more liberal planning rules have limited house price inflation  

 "We cannot afford to damage our export and productive sectors by policies which promote inflationary housing booms which in turn push up interest and exchange rates," Goff said

What he didn't say but had buzzing round in his empty head was...".keep quiet about how you allowed the credit based property boom to balloon after 05...beeee quiet....don't let them know you were a waste of space for 9 years"......

With mortgage servicing percentiles still hovering around 60% of the average wage, pretty much any house purchase could be considered "excessive property speculation."

"We cannot afford to damage our export and productive sectors by policies which promote inflationary housing booms which in turn push up interest and exchange rates,"Goff said.

Yes Mr Goof.  Your 39% tax rate, WFF, were very damaging.

Germany has a higher tax rate...doesnt seem to damage them.

regards

yeah bloody rich coming from a senior minister in the Labour govt that presided over the big housing boom

There were plenty of things they could have done to slow it all down

After all, you would think housing affordability is a key Labour consideration 

In all fairness the Reserve Bank is responsible for controlling the money supply, applying monetary policy to achieve price stability and ensuring we have a stable financial system.  If the RBNZ was truly independent they should've done more to counter the govt's fiscal policies and inform/educate the pollies and the public of the wider issues.  Unfortunately the RBNZ was also asleep at the wheel during the boom.

Not asleep meh...didn't you hear Smiley Wavey yesterday...the govt lowered the interest rates...not Bollard....he just did what he was told to do...."independent reserve bank"....Bullshit.

Hey Iain have you drawn any link between M3 and Total New Zealand overseas debt? Almost the same number. Comparing M0 to M3 is also interesting.

Goff and his mob really are lacking policy inspiration. They appear to have a dearth of talent,  creativity and charisma at present.  

"In the right conditions you could attract 200 banks to register here – each with a CEO and staff. You could attract insurance companies. Bring back lots of Kiwi accountants and lawyers. Single out clusters – such as high-class yachts – or other special sectors as the Irish did. "

The banks want to leave the UK becasue of regulation....so they are looking for a safe haven for thier amoral practicies.

So JK proposes instead of having a real economy we have the a-holes responsible for this global mess come  here....

I mean bring back lots of kiwi accountants and lawyers? they dont contribute to NZ......FFS its great their gone!

Get real business ppl who make a good not bean counters and losers....wait of course how silly of me, some more natural Ntaional voters....but the best!!!!! lots of banks to contribute re-election fees!!!!!  forget democracy, just buy it here in NZ.

What a great choice...Goff or Jelly Key...

bummer..........

regards

 

I mean bring back lots of kiwi accountants and lawyers? they dont contribute to NZ......FFS its great their gone!

Im hurt.

It sounds like things are a little different over the ditch - http://www.businessday.com.au/business/snare-a-home-loan-while-you-can-a...

Ooops got my associations mixed up: EMA vs MEA.

Nevermind Alex, it must have been a busy day, some of us knew what you meant. It's an easy mistake to make, until you look at the difference in policy each organisation advocates. NZMEA support the real economy.

Cheers, Les.

www.mea.org.nz

If LVR was a remotely effective way to control house prices could someone please explain Delhi?

In Delhi the price of renting or buying houses is way way more expensive than NZ relative to incomes and yet the maximum loan you can get is 0%, the ultimate LVR.

If there's too many people and not enough houses prices will rise.

Or could someone explain numerous small NZ towns which are affordable or have dropping prices because there's more houses than people - without the need for LVR controls?

Really? If there's one item that costs $1000, and 500 people that want to buy it, but they only have $1 in credit or debt each, then no one gets to buy it! Price is the only determinant of affordability. It doesn't matter what it is. If you cant afford it by using your savings and/or by borrowing, you don't get it. That's how LVR works. Only the person who gets to $1000 first  gets to buy it. ( or the price drops to $1 of course!) Perhaps that's the case in Dehli?

LVR by itself won't control house prices.  It would I expect reduce speculation and excessive borrowing which is what the officials are really concerned about and in turn would at least slow down house price inflation.  To become affordable, house values do need to revert back to the long term trend/average but this would require changes to land supply, valuations, building costs etc and further deflation of the bubble.

Only a combination of factors will have an overall affect on housing affordability.

"If LVR was a remotely effective way to control house prices could someone please explain Delhi?"

Honestly, Delhi is not a fair comparison to the NZ market. The building indrustry there is highly unregulated and builds extremely fast, has a population of 12 million in the delhi region and 22 million in the greated Delhi region.  On top of that there is wide despartity of income and due to the fact there is captial gain tax, a major component of the house sale has a official lower price while the rest is all under the table.

People here cry fowl when BH compares NZ market to US, so I guess it is fair to say the dynamics of Delhi housing market is fundamentally different to the NZ market.

I think a fair comparison would be UK or Aus market

Well lets see for a start compare developed world with developed world...so Texas had a 80% limit....seems to have worked or at least significantly helped.

Small towns...oh maybe because there is limited employment, net migration away from to find jobs and what there is is poorly paid....just the obvious things...

Sure house prices will rise if there is net migration in, so as you would expect a 100sqm house in Auckland fetches more than in Gore....but generally in Auckland and Wellington ppl have  higher salaries so they have the $ to pay the extra $......

 “The Reserve Bank is a bit ahead of the international pack, it’s been thinking through the issues of what they call macro-prudential regulation, which is, to deal precisely with property cycles that disrupt the macro economy, and they’ve disrupted it pretty severely in this last round,” he said.

“I’m satisfied they are, by international standards, well ahead of most regulators in thinking through how to handle property cycles, and asset [price] cycles.”

If the RBNZ is so far ahead why wasn't something done back in 2004 when they first noted issues regarding borrowing levels, house prices and so forth?

Blow it out your ear BE.  You didn't do enough while in opposition and you aint doing enough now.  No doubt you probably took advantage of property speculation advantages at the time as well.

Maybe in 2004 the Govn of the day didnt want to listen?

regards

Hey guys, was just having a look on the real estate website, prices have come down since last time I checked! It's now actually reasonably affordable to buy a place to live now, well, more affordable than it was 6 months ago. Obviously the fundamentals are sorting themselves out I think.

80% LVR's may not be the total solution to controlling property prices but it sure would make me feel more comfortable about my term deposits with the banks.

Curious

there won't be one magic bullet. The solution lies in a combination of approaches including restricting LVRs, liberalising planning rules, and taxation policy 

I think if LVRs are limited more people will struggle to buy a house. This will of course suit me as it increases tenant demand for my properties.

Limiting LVR will, on the back of the GST rise and depreciation removal, further discourage PIs from building houses to lease out.

Let's say, Your Landlord, people do struggle, in all sorts of ways. That's what the credit stats. indicate today. And Auckland  ( are there 1.25 mio of us?) re-densifies a tad, to save money, by even one quarter of a person per houshold - one property in 4 takes in an additional member- that's not much!. That's 1.25 mio/2.35 pph= ~530,000 properties. If we go to 2.6 pph that's only ~480,000 properties. That's  50,000 properties avaliable, coming to market and waiting to be tenanted.

There is in my opinion no doubt people "crowded" together more in the last 2-3 years of higher unemployment.

But this won't last and a pent up demand increasingly exists for people to "get their own space" as employment improves.

Khoon Goh (ANZ economist)  wrote recently that "stay-at-home kids could be all that is preventing us from facing a housing crisis".

I notice figures showing the number of jobs advertised is increasing significantly. An improving job market will see the housing shortage much worse than presently.

where are all the jobs coming from in Auckland? Name a sector that is turning up significantly

construction and related - no

finance - no

engineering - no

tourism - no (except short term RWC boost)

retail - no

manufacturing - no

Your Landlord, we don't have crowding here, in general. We have an excess of untenanted rooms in large house of all descriptions. We have almost the lowest density rate in our history. The times of plenty have come to an end. The density rate is likely to be on an uphill rise for some years. Why do you think the mass builder aren't building? Becasue they know there is no end demand for their product. It's years away, if at all, unless re-population occurrs. And if we "import" people, what are they going to do?

For our population we need to build 20-23k houses a year.

We are only building 15-17k a year.

The shortage grows each month.

yawn

you are not Tony Alexander in drag are you?

No.

No we don't! That number is just a repetition that is spouted out without any backing other than 'but our population continues to increase" Well does it? Most of our increase is natural, and as I've said before, 'babies don't buy houses' ( and the pipeline of previous babies can't afford them!) and the last I saw immigration was in a down hill path. Why do we need more people? To compete with the already unempolyed?

Study any period of New Zealand's history when house building was below the long-term trend.

You will find shortages of dwellings occured and rising rents resulted.

Try 1905, 1922, post depression and WW2 mid 1940s, post 1982.

Nothing is as it has been before. Because it was, doesn't mean it will be again. Do you think we'd be in this financial global mess if we could have avoided it?

"I think if LVRs are limited more people will struggle to buy a house. This will of course suit me as it increases tenant demand for my properties"

Really great "your landlord"  I am sure we will all be jumping up and down with glee with your statement above.

You really back up your fellow PI's,  that you are providing a "service" to the community.... that was a load of BS in the first place and you have just proven it.

Anyway where is all this money going to come from for your  "increased" rents ...... have you heard the expression "you can't get blood out of a stone'

 

NA and others

refer to page 5 of this link to see why it only takes a very minor increase in average occupancies to turn around housing shortages:

http://sra.co.nz/pdf/RealHousingChapterThree.pdf

In Argentina they have LVR at 50% and the propertied elite love the fact that the lower and middle class can't buy and s need to rent all their life.  When younger members of the elite families want to buy properties they get a private loan and the other 50% from the Bank .  This is the way to ensure an elite own much of the property and everyone else rents from them.

Muzza - thats an extreme example

We are talking about requiring a 20% deposit, thats a long way from 50% 

some of the PIs seem quite worried about the fact that both main parties seem supportive of the idea of restricting LVRs :)

they are getting around it by portraying restricting LVRs as something that "will lock out the poor FHBs" - as if most PIs would care!

 

 

Matt - maybe different ratios for different assets and purchase types, eg. looser for FHBs, tighter for specs/PIs, and more importantly, variable and used in conjunction with other ratios, eg. CFR, max fraction of loan on fixed, max fraction of foreign bank funding, cap. adequacy etc, and all variable. The OCR isn't a silver bullet, LVR's won't be either, ditto deconstraining land-supply, but again, do that too. I still reckon banning fixed rates would help, or letting RB vary the principle repayment rate of fixed rate loans.

Given under "normal"ecomonic conditions with postive yeild curve always producing higher long term fixed rates than floating I don't thinlk banning htem will be effective.

The market distortion in mid 2000's was a combination of cheap offshore money and NZRB pushing up the cash rate to control possible inflation.

Take out the cheap wholesale money now and yeild curve is likely to move close to cash rate.

Sorry but option to have NZRB vary peoples principal amount within their loan contract with Bank is, apart from being very difficult to effect, effectively over-rides the contract between Bank and client and may be difficult to enforce.

MM - re your first point, it doesn't matter what polarity the curve is, the point of banning them is to remove the inertia and policy response lag. The outcome would be less debt (it's how you'd manage your risk) for individuals and the nation, OCR peak would be lower (it'd not have to get so high to have the same inflation throttling effect) hence lower debt servicing costs, inflation would be lower and under better control (good for those on fixed incomes = savers), NZD would not be as overvalued and volatile, which would be good for the real economy, that is, the bit of the economy that earns NZ's way in the world.

Your second point, agreed, so limiting the fraction of foreign funds would help and not see us displace domestic savings with cheaper foreign funds from nations with looser monetary policies = good for NZ side savers. RB would not have to push as hard, see above.

Third point, agreed, so per above idea.

Fouth point, that method allows the borrower proetction from money market aberrations, but not from our sovereign monetary policy execution. When used, monies accrued would be held on account until rollover and then deployed as the borrower wished. As for the contract, simple, change the law to make it happen.

Another way to get a similar advantage (from a policy response perspective) is limiting the fraction of a loan that can be on fixed, noting that people mix loan types now.

It's about reinforcing the dynamics of the OCR regime and decorrupting the price signal aspec to make the OCR regime more effective in controlling inflation.

Cheers, Les.

Sorry but Banks lent bugger all to clients with multiple rental properties over 80% and I suspect none over 90%.

Even in boom times over 90% was not that easy to get but was done as was 100% loans to selected clients.

High LVR lending even in boom times was usually restricted to only owner occupiers buying first homes or existing property owners consolidating debt (like short term HP /credit cards etc), or refinancing etc.

LVR's is not the magic bullet and as I have said before high LVR's has been around for decades:

Early 1990 Countrywide Bank and United Banks routinely did 90% lending (even on rental properties)

Second and third mortgages were common place up to late 1980's where Banks lent to 66% or 75%, Building Societies / Credit Unions / Solicitors Nominees companies would come in behind as second or third mortgagees, and forgot about capitalised Family Benefits as well.

The biggest influence on property market in regards to rentals was the introduction of LAQC's so people starting buying multiple properties for tax reasons rather than based on true investing fundamentals like postive  cashflow. They had no idea why they were landlords, what there overall invstment stratergy was as long as they got a tax return at end of the year.

At least some of the changes (removal of depreciation /  LTC etc) will impact on this as anything which wil ceate a reasonable period of little to no property price growth (up to 10 years)  will be benefical to adjust affordability without distorting overall market. People will need to retire debt to create equity or wealth: what a change that would be!!!!

PS I have no axe to grind as I own two rental properties (small commercial, not residential as the yields are still too low there), retiring debt  and pay tax on these investments.

 

 

 

 

I know several people who bought investment properties in the "boom days" with 7-10% deposits

Restricting LVR - along with other measures - WILL limit house price escalation

I think we need to remember that restricting LVRs is much more than just being about limiting house price inflation. It protects house buyers. We only need to look at the recent chaos around the world to see the danger of 95-100% mortgages when the housing market turns bad (as it does on a cyclical basis) - negative equity and disastrous economic ramifications     

the ever reliable unconventional economist on NZ's exploration of macro-prudential tools like restricting LVRs:

 http://macrobusiness.com.au/2011/04/nz-considers-new-tools-to-combat-housing-bubbles/#comment-22837

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