English sets macro-prudential tool timeframe

Property

Finance Minister Bill English expects macro-prudential tool memorandum of understanding with the Reserve Bank by mid-year

28th Feb 13, 9:46am by Gareth Vaughan

Finance Minister Bill English says he expects to sign a deal with Reserve Bank Governor Graeme Wheeler by the middle of the year on the central bank's so-called macro-prudential tools, but warns they won't be a silver bullet to cool a hot housing market.

"The Reserve Bank and Treasury will finalise arrangements and I expect to sign off a memorandum of understanding with Reserve Bank Governor Graeme Wheeler by the middle of this year," English said in a speech yesterday.

"There are some expectations that these tools will be used immediately to dampen the Auckland housing market. Those decisions will be in the hands of the Reserve Bank. The greatest influence on the housing market will remain interest rates and supply constraints created by the planning system."

"Later this year, the Government will have more to say about how the financial stability tools will work alongside policies on more flexible supply in the housing market and social housing reform," English said.

He noted that under the macro-prudential tool proposals, the Reserve Bank will have a greater ability to influence the amount of lending done by banks and other financial institutions.

This could include requiring lenders to:

· Hold additional capital on their balance sheet as a buffer during an economy-wide credit boom.

· Hold additional capital against loans in specific sectors if risks emerge in those sectors.

· Adjust their funding ratios to use more stable sources of funding to avoid the impact of short-term funding shortages.

· Restrict high loan-to-value ratio lending in the housing sector.

He emphasised that decisions about loan-to-value ratios and bank funding and capital requirements should be made by an independent Reserve Bank rather than politicians.

"The temptation for some politicians to fiddle with the economy for short-term gain at the expense of long-term pain would be too great. In terms of the next steps, the Reserve Bank will publish a consultation paper next month and invite submissions and comments on the proposed financial stability framework," English said.

See more on the four macro-prudential tools the Reserve Bank is looking into here.

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34 Comments

by BigDaddy | 28th Feb 13, 10:13am 1361999634

Olly Newland hits it on the head on his blog:

"If this report is correct then the guaranteed outcome must be rising rents. If home buyers must find bigger deposits then it is inevitable that many will have to stay renting for longer. This in turn puts pressure on rents.

The only people that will be disadvantaged by any of the moves suggested will be the first home buyers, and low income families with limited deposits.

The rental market will have a massive shake up if the policy is enacted and there is only one way for rents to go as a consequence- and that’s up.

Investors should take careful note. Scratch together every cent and buy as many properties as possible which are suitable for rentals- especially properties that can house couples and families. That’s where the greatest pressure will be felt . Single folk can always bunk down with family or friends. Not so easy if it’s a couple and even harder if there are children.

The proposed moves may take the heat out of the housing market (very doubtful at best) and will, instead, transfer it straight across to the rental market.

Either way the investor wins while those who need to buy, lose"

www.ollynewland.co.nz

by Stephen Hulme | 28th Feb 13, 10:37am 1362001073

Thanks. Who do you know that is silly enough to let you and Olly in, or are both of you going to unload into the buying frenzy you hope to create?

by Christov | 28th Feb 13, 10:39am 1362001170

ha..! took all my restraint not to post a similar response...........well don't just sit there Bigdaddy get out there and buy buy buy as the Les Miserable' line up to cram in.

3 Meridith St Blockhouse Bay....go on my son , and no need to renovate, after all that's good enough for em.

http://www.harcourts.co.nz/Property/602865/BS130105/3-Meredith-Street

Auction tomorrow 4.30.....i'll look for a large father figure.

by Gummy Bear Hero | 28th Feb 13, 2:51pm 1362016311

Someone phoned into Tony Delroy's radio show on RN the other night , and asked guest Daryl Dixon that most basic of real estate investing questions :

" Why is negative gearing sacrosanct ? "

..... Dixon commented that in Oz residential investors earn $ 20 billion annually from their rentals .....

But the ATO ( Australian Tax Orcs ) is slugged with $A 3 billion in net negative gearing losses annually across the entire industry .....

Why is it in NZ & Oz that the average taxpayer is subsidising landlords in this fashion ?

by Christov | 28th Feb 13, 4:10pm 1362021025

Holy Cremola GBH, that is frightening stuff......I say impeach Newland, I wanna know his tax paid percentages, I wanna know where he was born, I wanna know who put him in charge.

Is Ollie Newland a tax doger...?proactive tax evasion is moraly questionable the futher you travel the sliding scale.

Warren B himself openly admits the imoralty of the tax percentage he pays...!

What do you say Ollie me old shylock...? is it ok for the schmucks to pick up the tab for your ilk...? that all ok with you...? or is it just legal.

by Stephen Hulme | 28th Feb 13, 5:36pm 1362026217

or is it just legal.

Yep - just common practice amongst the better paid. - but about to be stopped?

Currently, it is possible for people to keep debts on their city homes low, and debts on their baches high, gaining deductibility on interest costs as well as putting the baches into loss-making positions and enabling deductions against personal income.

by iconoclast | 28th Feb 13, 7:31pm 1362033066

Cremola, Granola, and Creamoata

(a) When Paul Keating came to power on the shirt-tails of Bob Hawke, around 1984?, the first thing he did as Treasurer was to legislate the cancellation of negative gearing. The immediate response of rental-property owners was to re-arrange their tax affairs by selling en-masse their rental investment properties. The inventory of rental properties available for rent dropped substantially. Rents on the reduced inventory of rental properties skyrocketed. Keating re-introduced negative gearing one year later.

(b) Stamp Duty on the purchase of a property is standard in AU. Around 2005 the NSW State Government introduced an added scheme where investment properties attracted Stamp Duty on both the Purchase and Sale of a property. You copped it going in and going out. Response of investment property owners in NSW was to sell out of their NSW properties and then either relocate to Queensland, or buy investment properties in Queensland. The NSW State Government cancelled the added Stamp Duty on sale one year later.

by Muppet King | 28th Feb 13, 11:17am 1362003471

What I think about here, is why would anyone give out proper investing information for free? Why would anyone, especially someone like Olly, want to give you proper information about how to invest in property, its most certainly not for your benefit, or is it because he's a really good person and wants to help everyone out? I don't think so...

by alioop | 28th Feb 13, 11:56am 1362005800

I think you and big daddy need to swap names.

by Keyser Söze | 28th Feb 13, 11:21am 1362003710

@ Bigdaddy

Hmm...either that or house prices and rents correct.

I was driving across town and listening to talkback radio (egad) - everyone was moaning about how having minimum LTR's would make it harder for first home buyers. That might be true briefly at first - but it will bring down house prices. Suddenly there will be less demand for housing which should eventuate in lower prices.

by steven | 28th Feb 13, 12:00pm 1362006012

Which is steve keen's comment on the OZ first time buyers guide....and LVR and allowing the RB to vary it depending on whether they want to warm or cool the market.

The fly in the ointment is ppl try and find ways around it....so my Q is why cant the pollies and loegislators write good enough lays to stop that.

The other point he made was the LVR's "natural rate" should be about 80% and that small changes ie +/-1% had big effects....yet we are at up to 95% and 30 years now.

So if 1% makes a big chnage what happens if 80% becomes law? market collapses?

regards

by steven | 28th Feb 13, 12:05pm 1362006323

The first time buyers handout in OZ is similar to the LVR limit tool ie it allows more first time buyers in. So look at the evidence there...ie as long as the handout is being handed out prices rise...when it finishes prices cool and even drop.

So on the face of it it seems quite likely that limiting at a LVR of 80% prevents to severe an over-heating, this certainly seems to have been happening in texas where they have a 80% LVR by law.

The only problem with a LVR limit is ppl try and find ways around it, so our legislators have to do better.

regards

by steven | 28th Feb 13, 12:09pm 1362006562

Assuming of course the housing bubble isnt pricked, in which case falling prices all those locked out buyers in.

Thats the trouble with Oly's models....he assumes a lot that may not occur...

Investors of course are also limited in their leverage, hence the entire system is more robust...so less ppl buying should cause a cooling in prices.

So you see I can draw up a model as well the only Q is who is right, Oly or Steve Keen, I'd bet on Steven Keen myself (and are).

regards

by splineman | 28th Feb 13, 10:35am 1362000919

House prices are directly linked to one's ability to borrow, or to put it another way a banks willingness to lend.

Easy cheap money is driving asset prices (houses) up. Pretty obvious.

What is less obvious to me is the firm predictions being made on rents as a result of more historic lending practices.

As though the asset price bubble we have seen in NZ property is normal or even sustainble.

Cheers

by Esprit | 28th Feb 13, 10:50am 1362001809

LVR restrictions on their own will do little to influence prices. All this will do is tilt the market in favour of the cashed-up buyer and/or the foreign investor. LVR restrictions are an excellent tool when used as a part of a wider strategy, but on their own, they're a death knell for the hopes of probably 60% of first home buyers.

by Gareth Vaughan | 28th Feb 13, 11:00am 1362002447

Unless first home buyers are exempt.

by steven | 28th Feb 13, 12:15pm 1362006945

That might actually be a crafty way to do it (cool the market) but making it work?

Hmm so a first time buyer can do 95% but the first time seller cannot? ie stuck at 80%? that of course shuts down the market anyway as the first time seller cant sell and get enough $s to leverage up to get a bigger house, so has to stay (ie the price movement is so small its not worth it.

However in such a scenario its possible that the first time buyer can buy a bigger house because of leverage of 95% that the first time seller cannot meet.

What happens if the first time buyer is forced due to work loss to move to another city? So they had say 90% LVR for the first home at say $400k in wellington but in being forced to move to say Auckland find now they cant raise $400k...and may even be forced to rent.

wierd situation...I cant see how that works?

regards

by steven | 28th Feb 13, 12:17pm 1362007042

but its a dynamic situation ie if 60% cant get in that in turn means the market cools, maybe stagnates and prices even drop, then some of that 60% get in..

regards

by kiwimm | 28th Feb 13, 12:43pm 1362008609

You are doing that 60% a favour. Instead of a lifetime's debt servitude on an overvalued asset, they will be able to wait (and save a deposit) until prices are more normal.

In reality, I will not hold my breath and wait for a political solution as none of them have the backbone to do what is right in the long-term if it means alienating existing voters in the short-term.

by steven | 28th Feb 13, 1:05pm 1362009959

However the rents are maximised by the landlords, ie every last drop of blood.

The Q is really are prices staying up at this level or do they drop and a long way...ie risk and impact. Then of course the ppl who jumped on still owe the original sum borrowed even if the house is worth 1/2 that amount. So they spend their life trapped in that house paying back money that never actually existed anyway....ie was created by the Fed at the click of a mouse and lent to a middle man who takes his cut and insists those 1s and 0s are paid back in full...

Somehow that strikes me as so wrong.

and the likes of Trasury says we are asset rich?

does not compute....comes across as total make believe, alice-in-wonderland stuff...

The pollies have across many countries simply porked the market with "short term solutions" that just made thinge worse and worse, masters of can kicking. Of course no scum bag pollie wants to be wiped out in the polls by frankly just another scum bag promising to can kick further.....so no, it wont change, not from the inside anyway.

regards

by kiwimm | 28th Feb 13, 1:36pm 1362011811

Rents are set by the market. If house prices fall, new investors can buy in and charge lower rent and still make a decent return which brings the rent down. It will lag the house price drops but it will happen. In fact, I would expect renting to have to return a decent % if capital gains were nullified.

Regarding the existing owners bearing the pain, it is better only a portion of the population suffers rather than all future generations. This cost to current owners could be helped by lowering the OCR or some good old fashioned money printing to boost inflation (as they have in the done US)

by kin | 28th Feb 13, 10:53am 1362002032

Easy money has always been the fuel for property inflation. All others are secondary (even supply situation). A rise in lending standards always leads to a lower property inflation at least in the short or medium term. (until Banks and borrowers learn to go around the rules).

Given a situation of existing supply, owners cannot raise rent as they cannot sell if rental cannot increase without taking a loss. Buyers cannot buy without higher cash outlay, demand should fall and prices should follow...lower prices should equal lower rentals..

Newland is raising the scare to dump ???

Bill English is as usual blaming somebody else for all the problems associated with expensive housing instead of this goverment's failed policies......no magic bullet means "I don't know what to do...." in polispeak

All I can say is that even if Labour's banner of 10000 houses per year for 10 years at 300k is flawed, at least we should give them a chance to prove they are wrong !!!

Last night's Cambell Live showing people living in container houses shows how disconnected National is from reality......Bill english equivalent of "let them live in boxes instead"....???

by jimmy squirrell | 28th Feb 13, 11:52am 1362005559

this is very good news IF the RBA uses it to put on higher LVRs and capital ratios (especially for housing related lending). We have a housing bubble folks, and easy credit has always been the primary driver of bubbles. The fact that the taxpayer is actually on the hook for excessive lending via explicit/implicit guarantees of our banks is the icing on the cake of the farce that is our banking system. For this reason, macro prudential tools can be a great tool to

a) lower prices and create more affordable housing and

b) protect the tax payer

c) reduce burden on taxpayer via neg gearing tax credits, this liability has risen exponentially as debt load has become higher and higher

A rule of thumb, if Olly and the real estate brigade think its a bad idea, then its probably a great idea. First home buyers will not be disadvantaged in the main as prices will drop /stabilise, removing the pressure from them to gear into levels of debt they (and the taxpayer) should not be exposed to. I do think however this should be accompanied by a ban on foreigners buying NZ residential properties as they have access to funds NZers dont./p>

by steven | 28th Feb 13, 1:10pm 1362010258

I dont think the tax payer can be protected, just look at Ireland...Our Govn would have to step in to prevent bank runs and closures or at that point we cant eat.

"a rule of thumb" frankly yes I agree...

ban on foreigners (unless they have residence and live here 90% of the year), yes accept no one will do that. Which is a pity because I think we'd see the over-priced Auckland market freeze real quick.

regards

by kiwimm | 28th Feb 13, 12:31pm 1362007863

If you have a $50,000 deposit, an LVR of 80% lets you buy a $250,000 property. At 95%, you can buy a $1,000,000 i.e. you can pay 4 times as much (loose bank lending criteria allowing).

Supply shortages push up prices but it is the easy credit that has given people the ability to bid up prices to their current bubble levels.

Foreign buyers make up a small percentage of sales. Reduce the buying power of local first time buyers and prices will start falling. That fall should put a hold on overseas investors appetites once they realise that Auckland property in not a one way bet.

by jimmy squirrell | 28th Feb 13, 12:59pm 1362009597

agree Kiwi mm,

its like gun control. Guns dont kill people, massacres always reflect some underlying problem - but why throw fuel on the fire and make a bad situation worse by allowing people to own AK47s (or in the case of housing too much debt)

by steven | 28th Feb 13, 1:43pm 1362012235

The problem is not owning ak47s the problem is owning any gun too easily and casually IMHO that in turn also gives those with criminal or mental issues easy access.

Example, in the USA 10.1 deaths per 100k, NZ 2.66 per 100k per year. For Switzerland they can even keep their modern automatic ex-military arms yet have a death rate of 3.84 per 100k. So there is Something going on sure, but its not likely the type of gun.

NB In NZ if you want a firearms licence its not that hard to get but takes time, a clean record, a bit of effort (install a gun case attend a free course) and you have to justify why you want one to the police so most NZers could get a gun if they wanted. In fact I think in south island 1 in 7 ppl have a licence while its 1 in 30 in the big cities, that is quite a high %, dont recall south island being gang warafe paradise with gun battles every night myself...

So no, its nothing like too much (housing) debt that I can see.

regards

by TimfromTaupo | 28th Feb 13, 3:55pm 1362020105

Well said Steven.

by jimmy squirrell | 1st Mar 13, 1:26pm 1362097574

Steve, i was using a general analogy about guns and a specific example of AK47s, but could have replaced it with assault rifle, pistol whatever you want. The point is, in the wrong hands and with the wrong incentives guns can do enormous damage. And likewise debt. That is why in both cases serious controls are required. We do need to protect people from themselves and wider society from people who make bad decisions.

by Stephen L | 28th Feb 13, 12:36pm 1362008195

Seems to me these macro tools may have a wider impact than just the property market; and it is just possible that English realises the exchange rate is a core variable that needs some management (although will never admit it, given his past hands off position). Talk of financial stability might well encompass exchange rate measures.

If the banks are required to have more capital; where will they get that from? Will it effectively be from the RBNZ, from NZ savers/investors, or from foreigners? Whatever the answer is will have impacts on the NZD that could actually counter any positive effects of the capital requirement, it seems to me.

It could also have impacts on NZ economic activity, which would need some other response from the RBNZ in terms of liquidity or interest rates.

Am not resisting any of this; in fact am supportive, just noting the wider impacts.

Separately I wonder if Mr Wheeler has been dabbling in the currency markets. The NZD drop has been a pleasant surprise. Is it just the markets, or some RBNZ help? I suspect the latter, and good on him if he has.

He otherwise remains somewhat hamstrung by the government's own management of its deficit needs. Borrowing from foreigners to fund the deficit, as well as selling power companies to the Aussies will remain headwinds that the RBNZ (and exporters/manufacturers) have to fight against, without a change in approach.

by Simon | 28th Feb 13, 1:51pm 1362012696

Lvr restrictions would make apartments relatively more attractive as they tend to require20% deposit already and generally yeild a lot higher so make more sense when speculation on capital gains is removed

by Chairman Moa | 28th Feb 13, 3:46pm 1362019589

Or 1st home buyers can go for 2.875% for 30 years and buy a house here, if they can secure a FX contract for the same period.

http://www.amerisave.com/?source=3891

by Basel Brush III | 28th Feb 13, 4:19pm 1362021566

See the accompanying article from S&P about risks of fall in values

http://www.interest.co.nz/property/63357/new-zealand-runs-risk-sharp-correction-property-prices-credit-ratings-agency-standard

If that happens look for lots of selling pressure from the flash funds of overseas speccys

by wtf | 28th Feb 13, 6:07pm 1362028077

Jawboning for public consumption to appear like they give a damn and are doing something. Hard to reconcile with Key saying several times they didn't want to do anything that saw prices go down.

Key said it was not the government’s intention to make moves which would lower property prices.

"That would actually undermine the value of everyone’s home in New Zealand – that probably wouldn’t be welcomed by the bulk of New Zealanders, certainly not home-owners," he said.

http://www.interest.co.nz/property/62329/pm-key-nz-housing-fix-increasing-land-supply-auckland-answer-not-massive-government-s

They know for better or worse rising property values are the only thing that give people the confidence to borrow and spend more. Our economy's a crack head addicted to mortgage debt and most Kiwis have convinced themselves that we are different to all the others that have gorged and imploded from too much of it. No government will be returned during a period of falling property prices.