Speed limit may hit 8,000 first homers

Property

Bill English discloses RBNZ advice that high LVR speed limit may force 25% of first home buyers to delay or downsize their borrowing

27th Sep 13, 8:16am by Bernard Hickey

The Reserve Bank of New Zealand has advised Finance Minister Bill English that its 'speed limit' on low deposit lending could force around 25% or 7,000 first home buyers to delay or downsize their home purchase.

English detailed the advice in an answer to a parliamentary question from Labour Finance spokesman David Parker. Here's the exchange

English said the bank had advised about 40% of high Loan to Value Ratio (LVR) lending had been to first home buyers before the introduction of the speed limit.

Of the 20-30,000 first home buyers every year, about 13,000-19,000 of those would normally be able to obtain a high LVR loan.

English said the bank had advised up to 12,000 would get a loan under the new speed limit and the remaining 6,000-8,000 would have to choose to either "look for a cheaper property or delay their purchase while they save a higher deposit."

He said the bank's estimates did not take into account the government's measures to increase the house price and income thresholds for KiwiSaver withdrawals and Welcome Home Loans.

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23 Comments

by kin | 27th Sep 13, 9:06am 1380229592

In two years time, 8000 kiwis will thanks their lucky stars that RBNZ in it's supreme slowness to act has finally enabled them to save themselves from themselves when the world property bubble finally collapses and decend into permanent depression......

by Machiavelli | 27th Sep 13, 9:25am 1380230700

Two years is it kin? So just as the global economies are grinding out of recession and just as the NZ construction sector is really starting to fire on all cylinders, and just as dairy and other primary food products keep hitting record high demand/prices and just as net migration to NZ is reaching record highs... house prices are going to collapse? Yeah righto.

by 2 Tooth Bora | 27th Sep 13, 9:54am 1380232489

Dream on Machiavelli when quantative easing stops and interest rates rise there well be big blood on the floor.

What makes it worse for Kiwis is we never had the GFC correction:(

by Machiavelli | 27th Sep 13, 10:24am 1380234247

QE isn't going to just stop. It will be tapered to minimise any perceived negative consequences. QE will have been a complete waste of time if they just switch it off and cause blood on the floor as you say. It's a controlled program with the specific purpose of minimising bloodloss.

Not sure about your second comment there 2 Tooth. Poor us we didn't all lose our shirts?! For years on this site I've been reading comments from people seemingly desperate to see financial armageddon in NZ with mass losses for all. Why? Yes houses are a bit overvalued in two of our main cities. We are implementing policies to fix this. It won't happen overnight. Maybe in ten years we will achieve a better balance. We don't need total carnage to get there - just sensible policies. Personally I hope house price inflation will remain at or below 5% p.a. I don't see it happening for at least another few years though. So I'm betting on that and buying today because I don't think house prices (in Auckland at least) will ever be this low again.

by kin | 27th Sep 13, 11:15am 1380237346

Yes Mach, QE won't stop.....that's why it's called QEternity....but what good did it do for Japan for the last 25 years ?? Infact what good did it do for their property sector for the last 25 years ??? I understand it is still FALLING !!!

by 2 Tooth Bora | 27th Sep 13, 12:39pm 1380242342

Mack the QE GFC solution has intended and un intended out comes.

You have great faith in the people who control the worlds central bank.

The poor quality overpriced NZ property market is highly speculative, manipulated; driven by greed and fear.

You must be a member of the "I'm all right jack" of property owners. One is refering to the large percentage that are not.

Never the less people still need to be able to afford a descent roof over there head which the powers that be are addressing. Combine this with increase interest rates the odds favour a fall out for "debt slaves"

Boo Hoo.

by Machiavelli | 27th Sep 13, 5:20pm 1380259255

2 Tooth. I have great faith that the poor quality overpriced NZ property market is highly speculative, manipulated; driven by greed and fear. I do not see that greed and fear dissipating. I am placing my bets accordingly.

You refer to debt slaves. I think of the great power of leverage.

Yeeha.

by notaneconomist | 29th Sep 13, 9:10am 1380399038

Mach - you're on to it. What some people simply fail to comprehend is that if you place restrictions and costs on the number of houses being built and then couple that with restrictions on abiilty to borrow you have just created the biggest inflationary boom that will make the 2002 - 2007 period look insignificant.

The world revolves around easy credit so any restrictions to that easy credit, i.e. 100% mortgages will push prices up. Those brown cardigan wearing, beige mentalities at the RBNZ have very little space between their eyes.

A simple little example of supply and demand mechanisms at work here:

If you have 1000 buyers and 500 houses the price of houses goes up.

If you have 1000 people wanting to borrow 100% mortgages but only 500 mortgages available at that rate, the price goes up.

Everything that is being implemented is placing a restriction on the supply side of the market and increasing the demand side. Immigration numbers are also ensuring that the demand side is increasing.

By the time FHB save their new deposit requirements, prices will have escalated away from them and they will find themselves needing to save a bigger and bigger chunk. There will be some squawking and the opposition parties will pretend to have policy that will fix their problem but their so called fixes will only exacerbate the issue even further.

It is quite simple if NZ wants affordable homes they will have to pretty much allow open-slather build where you want policy to rectify this problem and that is not going to happen. NZ has become a nation where the number of idiots outways the number of intelligent people so we have another supply/demand issue working away in the background.

by cowboy | 29th Sep 13, 11:54am 1380408881

"By the time FHB save their new deposit requirements, prices will have escalated away from them and they will find themselves needing to save a bigger and bigger chunk."

That is the exact point I discovered when I was discussion investment and retirement options with an agent many years ago. My plan was not to buy a residential house until my interest repayment was less than the rent outgoings (w/ rates&insurance factored in).

On paper, and in the short term, it looked like a good plan.

But after my agent friend tried to sell me policies I realised inflation and demand would always keep moving things out of my reach (as rent is inflation and price influenced!).

If easy credit came along I would be competing with those whom already had their boats in the water.

This is because inflation compounds. And a mortgage debt creates a "set point".

Once that mortgage is locked in, sensible interest rates allowing, inflation will eat away at the cost of the debt making it cheaper. Likewise that same inflation that I was fighting, would be floating my investments creating parallel equity to match the deflationary effect that was hitting my savings.

Then when it came to reinvestment, already having equity would allow me to utilise that equity to borrow (as opposed to savings which would be "spent" when converting to equity). borrowing against earning equity liquidates. saving liquidity into security (as banks are doing with LVR) solidafies the assets reducing its worth.

I needed to build equity and liquidify it to improve my skills, assets and worth - I was not going to be achieving that by solidifying my meager wage remains into a bank for 1-2% return (less fees!).

by kiwimm | 27th Sep 13, 9:08am 1380229703

Finally, some good news on this site.

by Esprit | 27th Sep 13, 9:18am 1380230310

... or it'll just force them to look elsewhere for their borrowings, like the non-bank lending industry that must be forecasting triple-digit growth figures over the next 12 months!

by Boatman | 27th Sep 13, 9:30am 1380231058

And this is a bloody good thing for all of us .

It will encourage thrift and force people to actually save like we and our folks had to do 30 , 40 and 50 years ago to buy our first home , and this stood us in good stead later, when we needed money to fix the car or to educate our kids at Uni , and could actually afford it without borrowing more .

The Gen X instant gratification of buying on 100% credit has never been a good thing for New Zealand , or anywhere else for that matter, as it always ends in tears.

by Crazylekiwi | 27th Sep 13, 9:35am 1380231303

Quite right Esprit

My mortgage broker was struggling to put together a deal for a new build for us with 15% deposit, but in recent weeks all sorts of non-bank finance avenues have appeared, and he is now able to present an offer at 10% deposit and an additional 100k in borrowing! Plus, at exactly the same rates as what the most competitive banks are offering. Go figure.......this could actually end up being worse than the system we had before. We're not prepared to go down that financing route at this stage, but I bet plenty of people will.

by Stephen Hulme | 27th Sep 13, 9:42am 1380231730

this could actually end up being worse than the system we had before. We're not prepared to go down that financing route at this stage, but I bet plenty of people will.

Exactly, and this is the reason OBR was instituted - depositors will be asked to re-capitalise our banks with what's left of the money lent to errant and basically insolvent borrowers.

Now that "bail-ins" have become accepted practice all over the planet, no bank account and no pension fund will ever be 100% safe again. In fact, Cyprus-style wealth confiscation is already starting to happen all around the world. As you will read about below, private pension funds were just raided by the government in Poland, and a "bail-in" is being organized for one of the largest banks in Italy. Unfortunately, this is just the beginning.

The precedent that was set in Cyprus is being used as a template for establishing bail-in procedures in New Zealand, Canada and all over Europe. It is only a matter of time before we see this exact same type of thing happen in the United States as well. From now on, anyone that keeps a large amount of money in any single bank account or retirement fund is being incredibly foolish. Read more

by waymad | 27th Sep 13, 9:53am 1380232396

Indeed, SH: the technical term is, Ah do believe, getting Cyprus'ed. Or that may have two 's'es?

But I do recall, and not fondly, the days when yer kind Solicitor would arrange 'bridging finance', generally at rates exceeding 20%, for the occasional financing gap or gapette.

Them days are Definitely back, what with payday loans, second and third tier lenders etc.

And, can anyone imagine a neater way to put ill-gotten gains through the wash, rinse, repeat cycle, than to lend that grubby cash out to Deserving FHB's? (Only qualifications needed for said FHB's - a pulse and intact kneecaps). Rate - somewheres between that for a commercial credit line and for a credit card.

I think the technical term is Unintended Consequences.

by cowboy | 29th Sep 13, 11:56am 1380408986

Top notch returns in second and third teir lending for those that can handle the risk :)

by 2 Tooth Bora | 27th Sep 13, 2:47pm 1380250033

Thats right and property is the biggest culprit.

Do you think the Nats have done enough to reign it in?

Particulalry after all the warning signs.

by Anarkist | 29th Sep 13, 11:47pm 1380451668

Stephen Hulme,

I beg to differ with the author's conclusion as to who actually wants to steal your savings. Its not governments who will be looting and plundering people's savings, but the private bankers. They aren't satisfied with conniving with compliant government regulators to transfer ever greater amounts of wealth into their hands through bailing them out so they don't pay for their reckless behavour, but large multinationals are lobbying governments to enact legislation which paves the way for them to loot their weaker domestic brethren.who have been saddled with the worthless sovereign debts of the badly governed nations in Europe. The banksters have a shotgun to the head of European governments whilst also gripping them by the balls. If we fail you bail us out, we win. If you don't bail us out, we'll plunder our depositors. Better yet, if we withdraw credit lines to a weaker bank, we loot THEIR depositors. We win the whole house! We keep our capital AND take someone else's money!

"So what we have, courtesy of the change in the bankruptcy laws is the means for banks to loot each other. Simply become a major short term funder via repo or hypothecation or a major counterpary in derivatives deals with the ailing bank and in both cases should the bank you are lending to go bankrupt, you will keep all the assets it pledged to you before any other creditor get a chance.

If I am right then MF Global was the first hint of Plan B in action. The bankruptcy laws allow a mechanism for banks to disembowel each other. The strongest lend to the weaker and loot them when the moment of crisis approaches. The plan allows the biggest banks, those who happen to be burdened with massive holdings of dodgy euro area bonds, to leap out of the bond crisis and instead profit from a bankruptcy which might otherwise have killed them. All that is required is to know the import of the bankruptcy law and do as much repo, hypothecation and derivative trading with the weaker banks as you can. To me, this gives a possible answer to why there has been such a surge in derivatives trading."

http://www.informationclearinghouse.info/article30016.htm

MF Global was the laboratory testbed, and Cyprus was a field trial. Who's next?

by Kate | 27th Sep 13, 9:48am 1380232138

40% of high Loan to Value Ratio (LVR) lending had been to first home buyers

Interesting. So, FHBs are not the majority of these high LVR loans.

What type of borrower then do we think the 60% goes to? I'm guessing the ones who like to call themselves "investors". And the point is - it is that 60% that competes on price (i.e. drives up the price) against the FHBs.

by waymad | 27th Sep 13, 10:28am 1380234480

Kate, I think the issue of upwards price transmission is a much more tangled and much wider tale, than just a few wide boyz signalling at auctions.

*Anything* which adds cost layers to a new house and land package, instantly infiltrates the suburb, the the city, market values, because it slips a floor underneath a key alternative to buying a used house: buying a new one.

So let's count the usual suspects:

MUL's and RUB's - the Productivity Commish' comparison here detailed a 10x differential as between urban and rural raw land prices per hectare.
Land banking
Building licensing (the professional/guilds are back)
Materials duopoly
Council development taxes
The elapse of time (at a modest WACC of 10%, the doubling period is 7 years)
Elfin Safety
Architects, agents and other Ms & Mr 5%'er's
Lack of factory made, well QC'ed modular homes at high volume/low unit cost

Worked example: a downsize situation (older couple, wanting to release their 4 bed 2 bath 200 squares home to a young couple). Say it's worth $600K latest RV. But they want to buy a new apartment or townhouse and pay off the mortgage ($100K) plus do the inevitable paint, curtain and outdoor finishing and furniture that a new shell needs. So they reckon they need a clear $150 K for the mortgage and the fit-out.

They go shopping for townhouses - they can remember seeing a nice one, distant water views, for $350K in some RE guff a while back. Back of the envelope calc if they get the RV: $100K to spare - cool.

Whoa! The nearest they get new seems now to be around $550K. What to do, what to do...

Sell the old show for $750K. Still clears the $150K for fitout and mortgage, leaves a bit of wiggle room on the new one but reduces the spare/float from $100 to $50K.

The difference in new build prices between that old townhouse brochure and today, has just pushed up their acceptable offer on the old shack by, spookily enough, $150K or a bit over the 20% deposit a FHB woulda needed on the old RV of $600K.

That is: the current new-townhouse-and-land build package price has just transmitted straight into their pricing expectation for the old place.

Or have I gotten this whole example horribly wrong? Common taters?

by Stephen Hulme | 27th Sep 13, 10:26am 1380234379

sry

by steven | 27th Sep 13, 9:55am 1380232507

Wow, 60% are therefore speculators...so if 25% of that 40% drop out thats only 10% less people buying...its a % but not such a big one.

Role on a CGT then....

regards

by Frostwind | 29th Sep 13, 8:24pm 1380439464

Steven,

We need a new toilet cleaner in my office. Will offer minimum wages + free use of toilet.