The Reserve Bank's limits on bank lending might lead to a dysfunctional property market, so, the rules need changing, according to long-time property investor Olly Newland.
Newland, who's also an Authorised Financial Adviser and author, told interest.co.nz the so-called speed limits put on high loan-to-value lending (LVRs) by the RBNZ from October 1 have created a "dangerous situation" that could lead to "chaos" further down the track.
But Newland also thought that a disrupted residential property market could lead to buying opportunities for investors - who might have a "field day".
New statistics issued by the RBNZ showed high-LVR lending, excluding exemptions, fell to just 11.7% of total new mortgage lending in October, down from 25.5% only a month earlier.
"There’s no doubt [LVRs] are starting to bite, contrary to what we all expected," Newland said.
"The banks are not only implementing these rules but they are implementing the spirit of these rules and not allowing people to borrow on their credit cards, or personal loans and so forth.
"And I think it is a very, very dangerous situation frankly, because the property market is like a giant chain and people sell and buy going around this chain and all these links are connected. People buy and then move up the chain or down the chain
"...And what’s happened now, the Reserve Bank has taken a big chunk of links out of the chain and problems are going to arise because this is not the way the market should be run at all.
“...I think we are going to end up with a dysfunctional property market if nothing is done about it."
Newland noted that next year was election year and said problems in the property market "would be embarrassing for the powers that be".
"So I am quite sure we will see the headlines over the next few months, where John and Mary wanted to buy a house and they were $10,000 short and they couldn’t buy a house and they are going to end up in a slum and so forth. It is not good."
Newland said he had heard from contacts in the market that a lot of builders - who build affordable houses - were finding a large chunk of their order book had "disappeared", because a large chunk of their order book consisted of people with deposits under 20%.
"...And suddenly, bang! They can’t sell them. And so the builders are screaming - and they are screaming - and this is getting much worse than it may appear..."
Newland conceded that he was surprised by how "harsh" the reaction to the LVR limits had been "and I think it is going to get harsher unless something is done about it".
"...I think we are going to end up with a dysfunctional market – which is very bad."
Newland said the RBNZ's rule on LVRs, which he likened to "taking a sledgehammer to a nut" needed changing.
He believed there were plenty of other things that could be done. He suggested for example a two-tier interest rate structure with one rate for home owners and a slightly higher rate for property investors.
"That would be one simple solution – and we could spend the rest of the afternoon discussing it – but I don’t think this system is any good at all."
'About to flatten'
Newland said he believed we had reached the point when the residential property market was about to flatten of its own accord anyway.
“…But to take a chunk out of the market and cause a disruption to the market is going to cause a bit more chaos down the line if we are not careful.”
Asked about what was likely to happen over the next year, Newland said the market now had "gone relatively flat" in the popular price ranges.
"...I don’t say it’s falling. It’s flattening out and hopefully that’s all it does – flatten out. So, people should be careful that they don’t assume that prices are going to rise forever – they never do, they always flatten out in the end. These new regulations are going to make it flatten out even faster. And maybe that’s not so good specially for builders and developers."
Asked what might happen to house prices over the next year, he said: "We are running a risk that the main centres like Auckland and Christchurch may flatten, while other areas such as Gisborne and Hastings and Rotorua – I’m just picking a few - could actually fall. They are falling now. They could fall further, and this is something we don’t need."
The RBNZ has said that it will need to start raising interest rates from next year in order to ward off rising inflationary pressures. This week the ANZ was suggesting the first rise in the RBNZ's Official Cash Rate might yet come as early as January, 2014, while last week BNZ's chief economist Tony Alexander said that floating mortgage rates could be as high as 6.8% by Christmas 2014.
Newland said he didn't think rates would go up as much as many were predicting, given the low interest rates around the world.
"...I think it would cause chaos to the exchange rate and to companies and businesses. I think half the country could be in the street with mortgagee sales if they are not careful, if it went up as much as some predict.
"So, I think if there’s any interest rate changes they will be very minor."
As far as the lot of the would-be home buyers are concerned over the next 12 months, Newland said any first home buyer that didn't have a 20% deposit was "absolutely stuck" and going to need to rent for longer – so rents should start to go up over next 12 months if the LVRs keep biting.
"What choice have they got? If a person can’t raise $100,000 minimum or whatever to buy a house – and that’s a big ask for many working class people – what’s their choice they are going to have to either live with mum and dad, which doesn't’t work out too well, or rent. And this is going to help landlords like me, that’s fine. But I don’t want to make profit on somebody who’s in an unfortunate position.
"But this is what happens when you start interfering in a market cycle."
Newland is sticking by his earlier comments that rents are due for a substantial rise.
"I’m always optimistic they are going to rise tomorrow from my point of view. But I think if nothing else changes rents are going to increase and they should theoretically double – but of course people can’t afford that because prices have doubled. But if we have pressure on the market from people who cannot buy a home and we have pressure on the market from increased interest rates then the only thing left is rental. And rentals must go up, they won’t go down."
Good for the investors
In terms of the outlook for property investors, Newland thinks that could be quite good over the next year.
"Well, if you’ve got a little bit of cash it could be a buyer’s market, suddenly, for investors and you can buy stuff to rent out because you’ve got the rents starting to make sense. It could become a real buyers market.
"So, I think investors could have a field day, which I think is contrary to what the Reserve Bank wants, so, we’ve got to watch this space very carefully.
"You should never distort the market with regulations. We’ve been through all that in the 1970s and 1980s with the Muldoon regime – distortions due to market regulations and the market went crazy – one way or the other, and we are running a risk it will happen again."