RBNZ says house prices remain elevated and could fall further, warns banks lending on higher loan-to-value ratios

RBNZ says house prices remain elevated and could fall further, warns banks lending on higher loan-to-value ratios

By Alex Tarrant

The Reserve Bank of New Zealand says house prices in New Zealand still seem elevated relative to incomes and rents, and has warned it is monitoring banks as they increase loan to value ratios in the face of elevated prices.

The comments came in the Reserve Bank’s twice-yearly Financial Stability Report released today, in which it said house prices may drift lower if enough buyers were unwilling to pay currently high asking prices.

Nominal house prices had only fallen 5% from their peak in late 2007, or 13% in real terms, the RBNZ said.

“While prices have not fallen far, housing market activity has been particularly weak over the past 18 months,” it said.

Tax changes, low confidence, low net migration and sellers’ unwillingness to accept lower prices had all contributed to slower housing market activity, the RBNZ said.

“There are few signs of an excess in dwellings (with construction weak in recent years), particularly given the earthquake-related damage in Christchurch. Some recent data has also suggested Auckland house sales and rents are strengthening,” it said.

“However, given that prices appear elevated relative to historical relationships with incomes and rents, prices may yet drift lower, particularly in real terms, for example if enough buyers are unwilling to pay current prices and prefer to rent while sellers’ expectations adjust,” the RBNZ said.

Any further negative news could cause a sharper downturn in the housing market, particularly if the labour market were to weaken sharply, or if interest rates were to rise rapidly, the RBNZ said.

Economists are expecting the Reserve Bank will next raise the Official Cash Rate in either December this year or March 2012, after the bank cut the OCR to 2.5% earlier this year as an ‘insurance policy’ for the New Zealand economy following the devastating February 22 earthquake in Christchurch.  

An eye on LVR increases

Meanwhile, in light of seemingly elevated house prices, the Reserve Bank warned it was monitoring banks as they increased loan-to-value ratios in bids to draw customers to the subdued housing market.

Tight lending conditions appeared to have begun to ease, the RBNZ said, adding there had been a material easing in lending standards in corporate lending as banks competed for business.

“Some banks have also increased maximum loan-to-value ratio requirements for home buyers,” the RBNZ said.

“The Reserve Bank will continue to monitor this lending, especially since house prices seem to remain elevated,” it said.

'Housing market bottomed out'

In the media conference accompanying the Financial Stability Report, Bollard said the current climate for the housing market, given high loan-to-value-ratios, was different to what was seen in the boom years of the last decade.

“What’s different this time is that there’s a concerted effort by households to be cautious to reduce debt, there’s signs that the housing market has bottomed out and is showing the start of a bit of growth, but we’re really not seeing the preconditions for any big rise in house prices or big rise in debt exposure,” Bollard said.

He did not think the banks were necessarily being irresponsible by promoting higher LVR ratios at the current time.

"You’ve got to look at where they're doing it, under what conditions they’re doing it," Bollard said.

"As I understand it that’s a pretty limited extent at the minute. It’s something that we will continue to watch pretty closely and we wouldn’t hold back going and telling the banks our views if we thought that was getting too exposed, but I don’t think it’s like that at the moment," he said.

'Supplementary tools not silver bullets'

Meanwhile Bollard said the Reserve Bank had now established quite a bit more information on supplementary macro-prudential policy tools it could look to use to control bank lending and asset price bubbles.

"We think there are some tools that, under very specific circumstances, could be helpful in assisting macro financial stability through the cycle," Bollard said.

"We do observe quite a lot on interest and some excitement around the world on these, and some of that is going to be disappointed because some of it, we thing, is unrealistic. We’re trying to be very realistic about this. We think some of them do look helpful. Could they help monetary policy as well? Well, only indirectly but possibly in the same direction," he said.

"To be a bit bit more specific, were we to see a build up of asset prices, or property prices, in a way that looked like it was leading back into the last sort of bubble, boom, then we would certainly look at some of these things, such as core funding ratios.

"But we don’t have huge expectations about those as silver bullets," Bollard said.

(Updates with 'no silver bullet' comments, comments from media conference on housing market bottoming out.)

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Funny thing the IMF just got through telling us that.......gees Bolly your on to it mate...and that's why we pay you the big bucks.....to tell us what we already know.

To be fair, the IMF just told us that after meeting with the RBNZ and Treasury :)

Sorry Alex which part did they tell you....the Bolly overpaid bit,,,,,,?the Bolly is onto it bit...?

The house prices too high bit

What Bollard failed to mention in his analysis (which the IMF did mention) was that the government through its accommodation supplement is seriously distorting the housing market (both in terms of rents and house prices).

You may qualify for this largesse!  Check your eligibility in one of these MANY helpful links to assist you with obtaining this subsidy;

http://www.workingforfamilies.govt.nz/accommodation-supplement/ 

or here;

http://www.workandincome.govt.nz/manuals-and-procedures/to_or_from_overseas/payments_from_overseas/payments_from_overseas-14.htm 

or here;

http://www.workandincome.govt.nz/manuals-and-procedures/income_support/extra_help/accommodation_supplement/accommodation_supplement-88.htm 

or here;

http://www.studylink.govt.nz/financing-study/extra-help/help-with-accommodation-costs.html 

or here;

http://www.sorted.org.nz/taxonomy/term/166 

(And I could go on).

They (we) spend over a billion a year on these subsidies.  The IMF reckons that rents would reduce by (a minimum) of 16% if the government got out of the market.  And naturally, house prices would come down with them.

I have to laugh at the argument for building more houses on the periphery of our main centres as a means to make housing more affordable.  Gvien the populist politics in NZ ... I can see "commuting supplements" on the horizon to compensate those who can't afford to live in their subsidised "affordable" dwelling as it is located some 30kms from their employment. 

 

 

Auckland waiting.... Policy already done

At last, a comment from an official body that does not assume rising house prices is a good thing. Times have changed.

Housing is an expense, it's a nice thing to spend your money on but it is still an expense.

Funny this should come from the RBNZ as they are the chief agency that encouraged the land and house price speculative credit bubble in the first place.

When will they learn that low interest rates encourage people to borrow money and do daft things with it or alternatively invest their savings in daft finance companies?

Where is the admission of past culpability?

 

 

 

'Funny this should come from the RBNZ as they are the chief agency that encouraged the land and house price speculative credit bubble in the first place."

 

When Brash was in RBNZ  he had OCR near 8%  ... during the inflation part of the bubble.

 

Agree with the rest of your post.

The RBNZ should consider issuing a directive to cap the loan to value (LTV) ratio at 80% . And that if a bank grants a loan at an LTV above 80% , the bank should pay a penalty of 0.75% of the loan amount.

This would just mean that the borrower pays the penalty, not the bank and I'm sure many would if it meant they could get the house.

Sorry to bang on about this but the RBNZ are both technically highly competent on a tactical  level and highly incompetent on a strategic level. How does this come about?

They keep interest rates low and encourage inflation. This means we must borrow and buy physical assets to protect ourselves.

They have an incoherent strategy.

I hear what u are saying Roger....   It seems counterintuitive that higher interest rates might be good.....  but u are right.

structurally.... the issues are far deeper than interest rate levels.

I,ve been thinking about the record bank profits and our (govt ) fixation with growth...

The system we have now.... Growth is basically reliant of rising levels of credit..  ie. growth is a result of increasing money supply thru credit.

This does result in actual, real economy growth....BUT it is really inefficient and there is a HUGE cost...  The cost is the "financialization" of Western economies.

If u look at all the Sector credit aggregate data... for the last 30 yrs we have been  borrowing to "grow".

this is kind of illusionary growth had has resulted in a significant % of GDP going offshore in the form of repatriated interest payments.

I find it strange that modern economists NEVER talk about debt, within the context of growth.

They seem to think that as long as GDP is growing...everthing is dandy..????

 

Cheers  Roelof

 

Sorry to bang on ...  When Brash was in RBNZ  he had OCR near 8%  ... during the inflation part of the bubble.

?

Bollard came in in 2002 and the OCR was introduced in 1999.

Brash had it as high as 6.5% from May 2000 to March 2001

Cheers

Okay Alex,  RBNZ pushed up interest rates during the inflated period.  Sheesh.

 

 

:)

The best thing for New Zealand at this stage is to maintain house price stability, i.e., a continuation of what we have being experiencing over the last 3-4 years. Let the price adjustment come in real terms as it has been doing during that time. A sudden or dramatic fall in house prices of >20% will be profoundly damaging to our already very fragile economy, and would quite possibly throw us into a full-on Depression.

Spending/consumption rates are already very low in NZ, and are having a negative effect on the tax take and on business, particularly small business profitability. A large fall in house prices will make that situation even worse.  Confidence would fall further, unemployment would rise, debt levels would increase, immigration would turn into emigration and businesses would go out of business. We cannot let that happen.

What we need is a gentle yet steady adjustment to house price affordability. What we don't need is sudden whacks up the side of the head because we deserve it and it’s suppose to be good for us and make us better. That's just crude, unsophisticated kiwi nonsense.

The other side of the coin when it comes to house price affordability in NZ is the problem of our low wages. That is an issue we must all start to address and focus much more on, and that includes interest.co.nz

 

a) You cant build out of the bubble....classic econimics would seem correct in this case, ie too much supply over demand sees a price fall, ie deflation.  All you want is to build more over-priced housing (ie what you call "market priced") which will do as much if not more than a Govn to deflate/burst the present bubble.....which was brought about by cheap credit, "no where else safe to invest" and crazy speculation....factors.

b) An economy isnt all about housing....not a healthy one anyway....ours is strangled by lack of investment in productive exporting industries and low wage employment sectors like tourism and agriculture....

c) looks to me like the present Govn is trying to slowly deflate the bubble before its bursting does to us what it did to Ireland....anyone sane who is in there should be seing that message and taking the opportunity to quietly be bail  IMHO.

regards

 

I take your point, Hugh, that there needs to be more affordable housing built in NZ, and that that is a very important part of making houses more affordable in NZ in general.  And I accept that that will only come if more land is made available to build on. However for me that comes with a caveat. I would not like to see NZ's towns and cities turned into large areas of urban sprawl. I would also like to see more land made available within the existing boundary's of our cities and towns used for housing., i.e., quality multiunit housing such as terrace housing, that we are so familiar with in Europe, and the US etc.

But you know when something is too expensive to buy but you want it (or even need it) then there are really only two things you can do. Borrow more, or get more of your own money. And it's the last part of that equation I'm interested in because that is largely a story about our wages. Housing affordability is, at the end of the day, as much of an issue of how much money we have as it is about the supply of houses, and I think we need to address both.

Building cheap housing on the fringes is a bad idea.

Fringe living should be for the wealthy who can afford to have multiple cars and spend hundreds of dollars a week on fuel.

150 new cheap crappy tract houses require over 3kms of expensive new roading, sewers, water, gas, electrical reticulation.  The capital costs get loaded onto the houses and future nmaintenace gets loaded onto everyone.  Plus public transport becomes ineffectual with low density sprawl.

 

 

 

Hugh...are you implying that Gerry Brownlee is a tosser?

 Hugh are you part of the banana republic ? As I explained many times neither Minister Joyce nor Brownlee perform to high standards, but are part of mismanaging our economy.

Your comment: No - Gerry is an OK guy, He should have put someone in as Recovery Minister of the calibre of Steven Joyce

Thereis a dislocation of price(or values) to rents according to the IMF

Meanwhile, the IMF also says - based on the OECD's price-to-rent ratio, that rents are 43% overvalued compared with the past 20 years 

A contributing factor perhaps is a case I am aware of where a Korean investor has tens of $600k+  houses rented out for under $600 per week each.  Maybe this is one of the HNWIs with $10m+ to get into NZ on a free pass (now to be updated by reducing their annual time spent here  from 73 days to 44 days).

These so called investors are prepared to accept lower returns than others would. I presume they have financing arrangements where the IRD never sees any return.

The Economist did a good piece this week on why property is a riskier investment than people and banks realise: http://www.economist.com/node/18250385

Debt and particularly its impact on consumer psychology is not considered to be an important factor in the models that economists have put together. This is completely bogus of course and until the Macroeconomics profession gets its collective house in order then frankly they are no better than overpaid soothsayers.