The affordability of New Zealand's houses is likely to be a key factor in controlling the country's house prices longer term, according to investment management firm Harbour Asset Management.
Harbour Asset Management's director, fixed interest, Christian Hawkesby said in a research paper that the Reserve Bank's new "speed limits" on high loan-to-value lending might help to cool the housing market in the short to medium term.
"[But] in the long-term, we believe that affordability will be a key factor restraining NZ house price inflation," he said.
The house price to disposable income ratio in New Zealand was "still elevated" at around 4.5 times.
"This is not only high by historic standards but the IMF, OECD and rating agencies all highlight that it is also high by international standards. Debt servicing costs in New Zealand have been eased by record low mortgage rates, but could start to bite in a rising interest rate environment," he said.
Hawkesby said that the introduction of LVR restrictions was "unchartered territory" for New Zealand.
"Our intelligence suggests that the initial response of banks has been to pull back significantly from high LVR lending," he said.
Part of this caution related to banks needing more time to come to grips with implementing and monitoring compliance to the new rules.
Until then, they had a strong aversion to being anywhere near their 10% limit, Hawkesby said.
"While data on new mortgage approvals is volatile on a weekly basis, approvals have trended down since the RBNZ announced its LVR restrictions.
"Surveys of housing confidence also suggest that sentiment in the housing market is becoming more cautious, especially in Auckland where a net 20% or respondents believe it is not a good time to buy.
Hawkesby said while household credit growth had picked up to around 5% per annum, it was still relatively modest compared to the mid 2000s when annual credit growth exceeded 15%.
"So it is hard to argue that 2013 has seen a 'credit fuelled' house price boom. However, the percentage of riskier high loan-to-value mortgages (over 80% LVR) has increased to around 30% of new lending, suggesting a growing exposure of some banks and mortgage borrowers to a housing market downturn".
Hawkesby believed the new LVR limits could introduce "some unusual dynamics".
"For example, aspiring high LVR borrowers with an existing pre-approval could rush to take out a mortgage before their pre-approval expires. Equally, banks could attempt to increase the growth of their low LVR lending (with increased total lending creating more headroom for high LVR within the 10% speed limit)."
Hawkesby said that in its September Monetary Policy Statement, the RBNZ forecast annual house price inflation to moderate to around 3.5% per year by 2015.
"Many private sector bank economists also have low forecasts of house price inflation, as they pick house prices to take a breather after a strong run.
"...In our view, mortgage approvals and housing sales should provide the best short-term leading indicator of the impact of the RBNZ’s LVR restrictions. In the long-term, we believe that affordability will be a key factor restraining NZ house price inflation."
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