By Bernard Hickey
Treasury officials included the option of a limit on foreign buying of property in a briefing paper to Finance Minister Bill English on July 2 as the Government grappled with its response to the Reserve Bank of New Zealand's impending high Loan to Value Ratio (LVR) speed limit.
The briefing paper was designed to offer English some options to mitigate the effects of the policy on first home buyers.
Those options included those that "would require more lead time to design and implement, but may help alleviate excess housing demand over the longer term," Treasury officials said.
They included more targeted LVR limits, more first home buyer subsidies, discounted sales of state houses to first home buyers, a capital gains tax, a land tax, extra measures to increase housing supply and restrictions on overseas buyers. It said these options might be feasible. It said it would not recommend stopping the Reserve Bank from implementing its speed limit. The bank went on to announce the speed limit on August 20 and introduce it from October 1.
The Treasury officials said the benefits to financial stability of restrictions on foreign buyers of homes were likely to be limited and that current data suggested non residents were "not significantly contributing to house price inflation."
"Policy flexibility appears very limited in this area due to restrictions under our Free Trade Agreements," they said, adding it could be considered further if further more specific options that complied with trade agreements could be found.
'Risky and undermining the speed limit'
Later on August 1 Treasury officials wrote an 'aide memoire' for English and Prime Minister John Key on proposals to mitigate the effects of the LVR speed limit, including increasing the number of Welcome Home Loans.
Treasury said a proposed increase from 850 Welcome Home Loans a year currently to 3,000 would mean that up to 50% of the likely 6,000 to 8,000 first home buyers who would be affected by the speed limit would be able to avoid it.
"The policy option of increasing Welcome Home Loans (which would be exempt from the LVR policy) from 850 to 3,000 would therefore undermine the ability of LVRs to dampen house price growth, increase risks to the Crown balance sheet and may cause the Reserve Bank to reconsider the use of this tool and/or the OCR," Treasury said.
"It may also work against housing affordability objectives to the extent that excessive house price growth continues. In addition to reducing the effectiveness of LVRs, expanding the Welcome Home Loan scheme may also reduce market discipline and lending standards, since commercial banks are no longer bearing the costs associated with losses on those loans," it said.
"A significant positive feature of our mortgage market was that banks did not relax their lending standards to the same extent as in other countries. A significant increase in the Welcome Home Loan scheme would encourage a move in that direction."
Treasury ignored
Treasury went on to challenge the Government's plan to increase income and house price thresholds for the KiwiSaver Deposit Subsidy scheme, whereby the Government pays up to NZ$10,000 to a couple saving in KiwiSaver for 5 years.
It said the expansion of the subsidy presented fewer financial stability risks because users would still face the banks' LVR limits.
"However, we do question the value of the additional spending, particularly as it will consume most of the between-Budget contingency. It is questionable whether the house price caps for KDS need to be lifted," Treasury said, pointing out that most of first home buyers using the scheme had bought houses below the current caps.
Treasury recommended the Government only increase the supply of Welcome Home Loans from 800 to 1,600.
Government eventually decided to increase the Welcome Home Loans to 2,500 a year and to increase the income and price thresholds for the KiwiSaver Deposit Subsidies. Here's that announcement.
Papers released by Treasury and the Reserve Bank also confirmed various factoids released through Parliament and various briefing papers, including that 6,000-8,000 first home buyers would be affected.
However, they also revealed that the Reserve Bank had found from data provided by two banks that 65% of first home buyers had high LVR loans, but 60% of the value of first home buyer borrowing was high LVR. They also said 40% of new high LVR lending was to first home buyers and 12% of new lending was to high LVR first home buyers.
The Reserve Bank also revealed in this briefing paper that house price inflation could be reduced for as long as eight years by the LVR limits.
'Unlikely to hit house-building'
The Reserve Bank also said it did not believe its LVR limit would have a significant negative effect on house building.
"Property developers will not be captured by LVR restrictions so will not be constrained from financing new developments," it said.
"Banks are generally cautious in lending at high LVRs to finance new house building anyway, given uncertainties over costs and final valuations," it said.
"There is a significant shortage of houses for sale, particularly in Auckland. Therefore, where a potential purchaser of a new house is unable to do so, it is likely that a replacement buyer will be easily found (but at a lower price)."
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