Reserve Bank says that houses under construction will be exempt from the 'speed limits' on high loan-to-value ratio lending

The Reserve Bank has done an abrupt about-turn and is now exempting new house builds from its "speed limits" on high loan-to-value lending.

This follows considerable pressure being brought to bear by the building industry in particular. See here for articles on LVRs.

Registered Master Builders Federation chief executive Warwick Quinn said he was "delighted" with the RBNZ announcement.

"With the exemption now in place building companies will be able to plan with more certainty and those companies who were contemplating restructuring in early 2014 and laying off staff will now hopefully not need to."

And Kiwibank was the first bank to react to the RBNZ decision with its chief executive Paul Brock announcing a 4.99% floating rate special for new owner-occupied construction. The bank has already been promoting a 4.65% floating construction loan offer in Canterbury as part of its rebuild commitment for the area following the earthquakes.
 
"We are already able to provide Welcome Home Loans without restriction. This enables us to help more people get into their own homes."
 
The special floating rate offer is a 0.66% discount on the published variable rate for the first two years from drawdown. The offer will be available for a limited time, Kiwibank says, with normal lending terms and conditions apply.

RBNZ's Deputy Governor Grant Spencer made the official announcement earlier that new residential construction loans would now be exempt from the LVR limits, with the exemption back-dated to the start of the limits on October 1.

Prior to today's announcement there were exemptions to the LVR policy for loans made under Housing New Zealand’s Welcome Home Loans scheme, the refinancing of existing high-LVR loans, bridging finance or the transfer of existing high-LVR loans between properties.

In making the change involving new builds the RBNZ has conceded that after it sought additional information on high LVR construction lending, the information had suggested the amount of such lending "may be more significant than previously thought".

"The Reserve Bank has recently consulted with the building industry and banks on the impact of LVR restrictions on residential construction activity," Spencer said. 

"While high LVR construction lending is only around 1% of total residential lending, it finances around 12% of residential building activity."

The RBNZ's now estimating that this 12% is the equivalent of up to 200 new builds per month.

Auckland and Christchurch currently account for more than half the country’s new dwelling consents. While the regional allocation of high-LVR construction loans is not known,  the RBNZ said it would expect the greatest impact of the exemption to be felt in Auckland and Christchurch.

The RBNZ is denying that this new exemption will defeat the purpose of the LVR limits.

The central bank said that the exemption would support new building "and therefore help to moderate house price pressures". This was "consistent with reducing systemic risk in the banking system".

The RBNZ would be monitoring banks’ construction lending, to ensure that "normal prudential standards are maintained" at the individual bank level.

Spencer said the new exemption meant that low deposit lending would fall outside the 10% speed limit, if it is financing the construction of a new house or apartment.

"However, any new low deposit construction loans will still need to meet the internal risk requirements of the lending banks."

Spencer said the new exemption would apply to all qualifying construction loans from October 1, 2013. 

"This exemption will help to support the supply of new housing and, in doing so, reduce some of the pressure arising from excess demand in the New Zealand housing market.

"The Reserve Bank will communicate with banks to clarify which loans will qualify for the exemption," Spencer said.

ASB economist Christina Leung said the RBNZ had acknowledged in its earlier analysis of the effects of the high LVR restrictions that reduced construction of new houses may be an “unintended consequence” of this new macro-prudential tool.

"There have been recent anecdotes from building companies that the restrictions on high-LVR lending, which took effect on October 1, are discouraging house-building demand. Building companies are reporting concerns amongst some households that if a top-up in mortgage borrowing is needed should unexpected additional building costs be incurred once the building project commenced, then there is the risk of the mortgage hitting the 80% LVR threshold and impacting projects," she said.

Leung said the RBNZ’s "starting point" was that the LVR restrictions would have little effect on new building. 

"However, early evidence raised question marks about that assumption. This exemption removes an unintended consequence of the LVR restrictions, and may encourage construction growth at the margin in the near term. However, given the new supply of houses would likely be higher than otherwise with these exemptions, there is likely to be less pressure on the housing market over the medium term."

Comment from David Hargreaves:

However the RBNZ chooses to spin today's announcement, there's no doubt this new exemption is a smack in the face for Governor Graeme Wheeler and a policy that in many respects he has staked his reputation on as Governor.

That this exemption has come so quickly following the introduction of the LVRs - and now backdated to the October starting date - means that it will inevitably water down the policy.

Additionally, the fact that one strong lobby group - the building industry - has been able to wield its powerful carpenters' arms and force the Governor's arm back behind his back, must inevitably clear the path for further future exemptions.

It was not very many weeks ago at all that Wheeler was saying he still saw no grounds for exemption for new builds.

Surely an exemption for the first home buyers will now be next. Look for that one early in the New Year.

What this all ultimately means is that, whether you thought it was a good idea or not, the LVR policy is now fast becoming a waste of time.

The RBNZ may as well now say to hell with the high valued New Zealand dollar and rip in there with an interest rate hike. 

A watered down LVR policy will not dampen the housing market. A blast between the eyes with higher interest rates will. It might cause some damage as well, which is what the RBNZ was worried about in the first place, but that might now be the only option.

Comment ends.

The Reserve Bank put out the following 'questions and answers' paper on the new exemption:

Did the Reserve Bank consider exempting new construction loans at the outset?

Yes, but we were guided by feedback from the LVR consultation, which did not focus on the effect of restrictions on construction lending.

We felt that the 10 percent speed limit would provide the banks with capacity to meet such lending, which makes up a very small proportion of total residential lending.

What has changed?

In response to feedback from banks and the building industry since LVR restrictions came into effect, the Reserve Bank sought additional information on high LVR construction lending. The information suggests it may be more significant than previously thought.

The evidence further suggests that banks are less likely to prioritise such lending within their 10 percent speed limits, owing to the greater uncertainty and complexity associated with such loans.

Does this exemption defeat the purpose of the LVR restrictions?

No. The exemption will support new building and therefore help to moderate house price pressures. This is consistent with reducing systemic risk in the banking system.

The Reserve Bank will be monitoring banks’ construction lending, to ensure that normal prudential standards are maintained at the individual bank level.

Will the exemption mean that anyone can now get a high LVR construction loan?

No. Banks apply their own lending criteria to construction loans and may set their own maximum LVR limits. The Reserve Bank still expects banks to act prudently in this area.

What is classed as construction lending?

For the purpose of the exemption, this means all residential mortgage lending to finance the construction of a new residential property.

The Reserve Bank expects that the construction loan would be for a property where the borrower has made a financial and legal commitment to buy in the form of a purchase contract with the builder, prior to the property being built. This could be traditional ‘construction lending’ where the loan is disbursed in staged payments, or it could be a loan to finance the purchase of a property, which will be settled (in one payment) once the build is complete.

The exemption would also apply to top-ups to the loan arising from construction cost overruns during the build. It will not apply to extensions of existing properties, nor to borrowing for discretionary expenditure, such as furnishings.

Why is the Bank not exempting purchases of newly built houses?

Newly built houses have already been built, with construction usually funded by developers (not subject to LVR restrictions) or investors.

We estimate that the share of newly-built houses that would be sold to high-LVR borrowers is very small, at around 2 percent of all new builds.

Exempting low deposit lending on spec houses would run a higher risk of generating distortions in the housing market, in the form of over-building or raising prices.

Further, such an exemption would be difficult to ring-fence, making it difficult to monitor and enforce.

When does the exemption apply from?

The exemption is applicable to all construction lending flows from 1 October 2013.

Banks that wish to take advantage of the exemption will need to furnish data on their construction lending flows, similar to that already provided as part of the LVR new commitments exemption reporting.

How much difference will this initiative have on new builds and will the effect most likely be in Auckland/Christchurch?

Our estimates suggest that up to 12 percent of total new-builds would be affected by the exemption. This is the equivalent of up to 200 new builds per month.

Auckland and Christchurch currently account for more than half the country’s new dwelling consents. While the regional allocation of high-LVR construction loans is not known, we would expect the greatest impact of the exemption to be felt in Auckland and Christchurch.

Will investors benefit from this at the expense of first-home buyers?

This exemption will apply to all construction loans, including loans to first-home buyers and investors. However, first-home buyers account for a far greater percentage of high LVR borrowing than do investors. They should therefore obtain a greater benefit.

This is the statement from the Registered Master Builders Federation:

Registered Master Builders Federation is delighted with the Reserve Bank’s announcement today that the construction of new homes will be exempt from the LVR policy restrictions.

CEO Warwick Quinn says the Reserve Bank has been very open in its discussions with them on the impact the LVR was having on new construction activity and he says it has reacted very responsibly in exempting new construction today.

“The impact on enquiry levels since the policy came into force was immediate and as time progressed it was not only low deposit buyers impacted but those who couldn’t sell their homes and others with more than 20% equity” Quinn said. “Collectively we saw enquiry levels fall by 27% which would have created a large hole in the residential building sector mid 2014”.

Quinn says the issues related to ensuring housing supply was maintained so that the LVR policy could have maximum effect. With the exemption now in place building companies will be able to plan with more certainty and those companies who were contemplating restructuring in early 2014 and laying off staff will now hopefully not need to.

The banking industry body, the New Zealand Bankers' Association had this to say:

The New Zealand Bankers’ Association has today welcomed the Reserve Bank’s move to exempt new residential construction loans from the loan-to-value (LVR) restrictions it introduced on 1 October.

“We’ve said all along that supply has always been the issue in parts of the housing market, not the availability of cheap credit,” said New Zealand Banker’s Association chief executive Kirk Hope.

“We agree that this move will help to support the supply of new housing and reduce pressure on demand in the New Zealand housing market. We support any moves to address the supply issue.

“The Reserve Bank’s response shows flexibility and an ability to respond to industry concerns. We applaud them for taking on board the feedback provided by banks and the construction industry.

“This move complements the government’s efforts to address the housing supply issue in Auckland,” Hope said.

Labour's Housing Spokesman Phil Twyford put out the following statement:

The Reserve Bank has bowed to the inevitable today by exempting new builds from its Loan to Value Ratio lending limits, Labour’s Housing spokesperson Phil Twyford says.

“The Master Builders’ evidence that the lending limits were putting thousands of new builds at risk blew a hole in the Government’s policy of trying to increase housing supply.

“The mystery in all of this is why the Government didn’t properly think through LVRs in the first place.

“They didn’t consider the effect on new builds, the fact it would lock first home buyers out of the market, nor that it would depress already stagnant house prices in many parts of regional New Zealand.

“The Government’s housing policy is a shambles. Its chaotic management of the housing crisis has seen it effectively contract out housing policy to the Reserve Bank with no proper consideration of the effects on hardworking Kiwis trying to realise the dream of home ownership.

“Meanwhile, today’s announcement by Westpac of higher interest rates for low-deposit borrowers just confirms the existence of a two-tier home lending market.

“We now have a two tier system. The easy money goes to the well-off, and property speculators both foreign and domestic. While first home buyers who struggle to get a 20 per cent deposit together now have to cop higher interest rates.

“Westpac's home loan repayment calculator shows average Auckland home buyers on low deposit loans will now be paying over $200 more per month than those who can afford a larger deposit.

“Labour would exempt first home-buyers from LVR lending limits while our KiwiBuild programme would build 100,000 affordable starter homes, and a Capital Gains Tax would clamp down on speculators,” Phil Twyford says.

The Green Party had this to say:

The Reserve Bank’s decision to exempt new house construction from loan-to-value restrictions is a positive move that should help to ease the housing shortage, Green Party Co-leader Dr Russel Norman said today.

The Reserve Bank has announced today that its recently introduced loan-to-value (LVR) restrictions will no longer be applied to new construction loans. Statistics indicated, since LVRs were introduced, that there had been a sharp drop-off in planning for new house building.

“A more flexible and smarter approach to LVRs will help to dampen the housing bubble without choking off new home building,” said Dr Norman.

“New Zealand needs to build more affordable housing. The LVR exemption is welcome in that regard, but it is not a full solution. We need a Government-led programme of affordable house-building and Progressive Ownership to give families a pathway to owning their own home.

“The Green Party also want to see more flexibility for first home buyers. The evidence so far is that LVRs are locking young families out of the housing market but having little effect on wealthier investors – the opposite of what’s needed.

“LVRs can work, but they need more to be more sophisticated than the Reserve Bank’s initial ‘one-size-fits-all’ approach. The exemption for new builds is a step in the right direction. I would like to see the Reserve Bank take a smarter approach on all fronts, rather than using blunt tools that hurt the economy,” said Dr Norman.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

103 Comments

That's an enormous carve-out. It could disproportionately push first home buyers into new homes that they can't really afford.

Maybe the RB has overdone the LVR so is now trying to back peddle a bit.
regards
 

Zoltuger
Do you believe the banks are making housing loans to households that cannot afford the repayments ?
When the banks make their decision, do you know what interest rate they use for their risk assesment ?

There are unintended consequences when exceptions to the rules are created.
 
Small town NZ: A first home buyer, who has a small deposit, can't afford a pre-existing home, so he builds a new one. You end up with a new home in an area that already has an oversupply of old homes.

And the answers to my 2 questions are.......?

The answer is simple. Go and live in small town NZ.  Lower cost of living, out of the rat race, better education and environment to raise kids, less time and cost commuting.   May be wages are lower, but not much, if at all.  Over all you will be far better off financially and from a lifestyle perspective.

No it's not that simple. What if all your family, and friends are based in the city you live in? So your'e giving up all your support networks. Plus you are assuming that the job that someone has in, say Auckland or ChCh, would be transferrable to a small city. I'm sure that most Aucklanders would agree that Auckland was a better place to live when the population was smaller, there was less traffic, lower house prices relative to incomes, slower pace of life. If moving to a small town was such a no brainer, then Auckland population would be static, not growing.

Lots of people are expected to shift to Auckland without any consideration of family and social ties, so I don't see that we should be too worried about the converse.  You will find small towns pretty friendly and inclusive so you will make new friends, besides which NZ is a pretty small country and it is easy to keep up with your truely good friends and family.  If you insist on ignoring the market signals then you can hardly complain about the consequences.  (This sounds harsh, but is exactly the message given to the rest of NZ faced with the prospect of moving to Auckland)

"expected" and get the "bird"  as an answer.
 
regards

"May be wages are lower, but not much, if at all."
Wrong on a lot lower,
a) I guess it depends on the sector you work in but on the few occasions Ive seen a job a 30%+ pay cut would be necessary. 
b) Ive stayed "rural" for a few weeks every year and food etc is a lot more there than Wellington...10~15% more.
regards
 
 

Chris-M, I know it's hard to believe but some of us love living in Auckland. The cost of living is the same apart from higher house prices (but capital gains make that 'sacrifice' more than worthwhile). I don't feel like I'm in a rat race at all - vege patch and chickens out the back, ocean a few minutes away, Waitakere ranges at my doorstep. The best schools in NZ are in Auckland so not sure what you mean on this front. I don't commute during peak hour traffic so barely notice a problem. 
 
I think we need to be careful not to project our own experiences and preferences onto others. Some people like the country, some like the city. Asserting others will be better off outside of Auckland financially and from a lifestyle perspective is nonsense. You might be but I'm not. In fact I've done well compared to many of my friends in small town NZ on both financial and lifestyle fronts largely because I have chosen to live in Auckland.

I love living in Auckland too, and Dunedin, Tauranga and Wanaka.  I have an ongoing  pretty wide perspective.  The sad reality is that if you are in the low wage demographic in Auckland,  it is unlikely that you will ever afford to own your own home, your kids will grow up in an environment that is full of powerful, bad influences: their teachers main focus will be to keep the class under control, accademic education is a second priority,  and life will be one long struggle to get from one paycheck to the next, especially as over half your wages will go toward rent for the run down over crowded house that you may well be forced to share with your extended familly.   (assuming that you are lucky enough to recieve a paycheck)  In that not uncommon case, believe me you would better off out of the place not withstanding the fact that it is climatically and geographicaly blessed; and probably one of the most beautiful cities in the world.

I agree the cost of accomodation is higher in Auckland. No arguments there. I think the rest of the issues you raise are not Auckland problems but national problems. The issues you have highlighted are poverty, education and job security. It's a bit of a stretch to say these things are only issues in Auckland. 

We mostly educated our kids in Dunedin and even the worst of schools would be far better.  Salaries and wages were still pretty good and most of those other issues were very rare, as they are in a lot of other towns and smaller cities.  Most of those issues have their roots in over crowded over expensive housing; so as this is a particularly Auckland problem the consequential problems are probably worse here.  (Generalisation obviously there are some other problem areas - Northland, Tokaroa et al).  I have seen examples of South Auckland families that were in real trouble in Auckland, shift away and sudenly everthing comes right and they blossom.  A Pacific Island colleague confirmed my obervations in her description of differences in life that she experienced growing up in Auckland and then out of Auckland.  Interestingly she has chosen to take her family back to the islands for the sake of bringing up their family in a better social and educational environment.  
I might be jumping to an assumption but you sound as if you, like many Aucklanders have rarely seriously ventured south of the Bombays.  There is lost of great stuff there too.  Some of it is stunning.  Some has a fantastic culture. Some is exciting and engaging.  Some is very enterprising and creative.  A lot would beat the pants off Auckland in terms of ecconomic contribution to the country.   It is just a pity that Aucklanders think that they are the centre of the universe. 

Chris, I have spent just 1/3rd of my life in Auckland. Such is regional pride that up until a year or two ago I still couldn't accept I was an Aucklander! I now embrace it and have huge pride to be a part of such a wonderful city. I love this country from Bluff to Cape Reinga too. We need to move beyond regional-poppy syndrome. Just because someone likes living in one area and not another that does not mean the area they choose not to live is a bad place.
 
The issues you point to are not specific to Auckland. They have much deeper routes than simply housing alone.

Yes Z, but quite consistent with the RB's crawling to banks, speculators and Pollies under Bollard and the incumbent. The value of apartments and new homes in new suburbs take the biggest knock in market downturns too. Young, aspiring homeowners are being done no favours here; they should stay renting in central Auckland or Christchurch  (why anyone would want to live in either squalid place is beyond olde Ergophobia), or move to cheaper, nicer towns.
Regards, EP 

No brainer now for auckland FHB's.
600k with 120k dep for a rubbish old run down property, or spend 250k on section and 350k on brand new house with only 60k (or less) deposit required.

Exactly. Equally, depositors need to relocate their unsecured bank funding to safer destinations and leave the heavy lifting to hedged foreign wholesale lenders. OAPs have no business lending 90% or more to underfunded, grasping FHB's.

does:
or it could be a loan to finance the purchase of a property, which will be settled (in one payment) once the build is complete.
mean off-the-plan pre sales..
 
legit or qualifying re-sales for a developers feso funding have always been part of the dark arts..
 

Likely. If you look at all the Governments PPP new build public housing initiatives at the moment (Hobsonville, Manchester St Apts etc.) the HNZ purchase component of the overall subdivison/builds wouldn't be enough for the developers (or the developer's bankers, of course). So the private capital side of the PPP partnerships probably "did a Chorus".
 
 

"grasping" thats funny, OAPs expect huge (>7%) returns and are whinning they are not getting them, just who is "grasping"?
You are right on the risks though, a depositor isnt getting the return for the risk at 3 or 4%....but lemmings will stick to it.
and safer is?
regards
 

"grasping" thats funny, OAPs expect huge (>7%) returns and are whinning they are not getting them, just who is "grasping"?
 
That's why the RBNZ is busy back pedalling on LVR restrictions - older family incomes can no longer stretch to finance the 20%+ deposits for their issue.

dp

What is going on at the RBNZ?
Like the Judiciary , this is supposed to be one of New Zealands more respected independent institutions
They have dug themselves into a hole on this one and cannot go back now , not ever.
Interefere  in a free market at your peril , it always has uninteded consquences .

  • Flip flopping  , no somersaulting  , on a major policy issue in less than 10 weeks.
  • Giving a Christmas bonus to Auckland Land Bankers

We have a land shortage in Auckland , and now we are favouring new builds on Vacant land ....... a really scarce resource. 
We have building material inflation at somewhere between 3 and 10% , and now we give it steroids.
 
 

What is going on at the RBNZ?
Well Boatman you just might want to ask Billy bob bout that, the Governor has been knobbled, compromised, put in the damned if you do place.
As far as interfering in a free market goes, that my frien is exactly their job when that free market leads us to unbalances in GDP, corrupt practice by monopolies,irresponsible lending by Banks , and of course irressponsible borrowing by Govt.
Read the charter they are our backstop in the best interests of the wider citizenry.
Any  flip flopping almost always occurs from the office of  Finance Minister interfering with RBNZ policy  by means of pressure brought to bear  on agendas that may not run their course therefore the lesser of two evils is implied  by the Minister  as a compromise.

Why interfere in a perfectly free market in secondhand houses ?
Restricting access to the market  was going to lead to unintended consequences .
We know the causes of Auckland house price increases is a land shortage , cheap money and an open door immigration policy .
We chose to blame the Banks , who like and purveyor of any product , were simply  reposnding to demand for thei product .....morgtages.
What were they thinking ?

I don't argue unintended consequence Boatman in fact, pointed that out here at the announcement, but if you think the obsession with housing in N.Z. has not had a dramatic impact on N.Z. small to medium business investment here in N.Z. ...you would be wrong, and the Governor knows full well we have to be earning money not just sending it in circles till the pond is stagnant.

Where do you find a section for $250,000 in Auckland? Wellsford?

Party on!

This will push up the price of new builds which will in turn push up the price of existing stock.
If you want make housing cheaper, then you have to lower the price at the margin (new builds). A better move would be to remove or lower GST on new builds.

The best way to address the housing affordability issue is to deal with the supply/demand factors.
Supply - unlock a lot of rural land at the city margins over the top of the local authorities.  Task the the Comerce Commission to deal to the building material monopoly/duopolies that have pushed our building materials to 2-3 times higher than compedative overseas countries.
Demand - Shut down wholesale immigration and sales of property to foreigners.

The demand thing your'e talking about there would work and be easier to implement.  It's much easier for someone to jump on a plane than it is to build a new house. Expanding the city limits indefinitely is not going to really improve quality of life in Auckland especially it will just mean even more clogged motorways. How does an expanding population improve anyone's quality of life really?

Agree with you strongly re the immigration/quality of life thing.  We do not need more people.  We cannot adequately employ our present population and this especially includes the immigrants.  Did you see those poor Indian taxi drivers at Auckland Airport making $4.00 per hour.  The bulk of our real wealth is generated by a handful of folk in the rural and tourist sectors.  The rest, Auckland especially are just an expensive overhead sucking the life out of the productive sectors and certainly should not be expanded for every bodies sake, especailly their own.
I cannot see any moral foundation for artificially constraining land supply because it is a gross distortion of the free market that works against countries overall efficiency and only benefits overseas bankers and property speculators.  The demand for more land will be largely determined by the population growth, so once demand is satisfied you could allow building pretty much anywhere and you would not see land consumed beyond organic popn growth.  (How can any sensible ecconomy sanction unsatisfied demand?)
Re Auckland crowding etc.  It would be better to arrange the city on a matrix of residential and employement zones rather than a few employment hubs surrounded by resential areas, so that people can live close to their work.  That is if we need an oversized Auckland; which we do not.

Why unlock land at the edge of the city? They should de-zone or re-zone areas like Ponsonby, Arch Hill, Parnell, Newton etc and encourage developers to build efficient medium density housing  - 3 story terrace walk-ups or similar.
This would:
- get rid of a lot of draughty old villas therefore decreasing energy use/demand
-increase the amount of people and general vitality of AKL cbd 
-bring house prices down regionwide
-more people would walk or bike to work and not be such big fatties ;-)

Excellent idea: Efficient medium density housing close to town
 
Entivitable issues:

  • Land owners upset at reduced land value
  • Land owners upset at perceived pollution/overcrowding of medium density housing
  • Land owners are voters
  • Politicians are land owners
  • Excellent idea gets trampled upon and destroyed by NIMBY land owners

That is also where people want to live (as reflected by the high prices). That is where the Draft Unitary Plan was heading. That is the most sensible solution. Except the current residents got so upset that the Proposed Unitary Plan has gone 180 degrees and central suburbs are now getting reduced densities and locked down instead. So prices will increase.

Agreed, anything which can reduce the price at the margin will bring down the price across the market. Cheap rural land converted to housing will reduce the price of land across the city. Reducing building costs, compliance costs, council charges and taxation will also help.
 
Location will always play a role in relative pricing but the market as a whole will come down once new build costs fall. Better to engineer it down than wait for a bubble to pop then re-inflate then pop again which is what we are probably headed for if nothing changes. LVR restrictions are a lowering of the ceiling when what we really need is a lowering of the floor.
 

Unbelievable.  Exactly 5 weeks and the rules change

Where did the pressure come from?
Did Wheelman Wheeler get out and test which way the wind was blowing, did he talk to a few FHB's, did they have enough clout, or was it the bank lobbyists, or was it that big builder, or was it political?

Interesting - shows what can be done when they want to.

Pity they can't act with the same speed on migrants, you can buy a house, but has to be a new build

The lobbyists got to him - not young FHB's
 
The Registered Master Builders Federation had said the central bank's policy COULD jeopardise the construction of up to 5000 homes a year and it was seeing an increased number of planned new builds cancelled as a result. (how many get cancelled under normal circumstances?)
 
Reserve Bank Deputy Governor Grant Spencer said today the bank had decided on the exemption after consultation with the industry.

Maybe it was the data. ie the price signals / FHB activity were way more severe than the RB expected....
regards

This makes Wheeler and co look silly.
Wasn't the idea of LVR restrictions to make the financial system and banks more secure?
The slow down in new houses being built has nothing to do with the security of the financial system. It's an unintended outcome of the main problem they were addressing.
So what is the Reserve Bank trying to target? Seems to me they are getting confused about the reason for their own rules.
PS. I love watching all this floundering around by government employees. More opportunities for profits here methinks.

Silly, floundering couldn't  agree more. And what about his answer to the first question above.
Did the Reserve Bank consider exempting new construction loans at the outset?
Yes, but we were guided by feedback from the LVR consultation, which did not focus on the effect of restrictions on construction lending.
Shame the RBNZ didn't listen to John Key when he wanted them to exempt FHB at the start.
 
 

Let's get playful with the new rules...
I'm adding on a new bedroom to a two bedroom property I'm about to purchase?  Can I be exmepted on that portion of the purchase price? Maybe not...how about that new sleepout then....
 

That wouldnt be a new build then.
regards

are you sure...couldn't a sleep out be a new residential construction?

If Wheeler and co want to fiddle with the market place, they will get unintended consequences.
Now they want to fiddle with their fiddling.
Great fun watching all this unfold.

At least the RBNZ are taking a proactive approach and trying new strategies. Better than just moving the OCR which effects unrelated industries and exporters.

It certainly is going to be great fun listening to the squealing when they drop the LVR maximum for investors to 70%.

I am an investor spottie. I would welcome any such idea. Lots of money to be made with restrictions like that.

Short term thinking. If you think prices are going to 10-12x income fair enough. Otherwise, the yield is too low.
Does property investment make sense to you at present if there was no prospect of capital gains above inflation? (genuine question)

Zanyzane, I have read your previous comments on the unitary plan and you may well be right about areas where high rise development is allowed. Many investors are buying property in areas where this sort of development won't happen.
I guess in that sense there is always potential for a savvy investor to make money in almost any market. I just don't see on average how an investment right now will make sense in the long term (perhaps I'll regret my lack of vision, I guess time will tell).

"The Unitary plan allows for 17 levels in 10 metropolitan city."
 
I don't think so. Metropolitan centre has 18 levels/72.5m, but then there's additional height limits overlay so basically nowhere outside CBD with very little allowed over 5 levels/20m.
The UP CBD 50m max zone has extended from Mayoral down to Wellesley Street halving the current allowable height of buildings in those blocks.
 
The UP level control will be more relevant than the height limit control. The existing MU has 15m so can get 5 floors (easily with a semi basement) whereas the UP MU 'increases' height to 16.5m but limits levels to 4 so at a generous 3.6m FL to FL isonly 14.4m. 
 
I am struggling to find much in the UP that makes it easier to develop or adds density.

New builds usually cost more than an existing house. Once you've paid about 400k for the average Auckland section, then another 300k minimum for the house, for a very basic and small house at that, then you can see why people choose to buy an existing home. Way less stress, and usually cheaper. But I think this is a good move overall, as it will encourage supply.

Hmmm, is this to give cover to an immediate OCR raise, I wonder?

No, he has been leant on, guaranteed, 100%

No, he has been leant on, guaranteed, 100%
 
Totally agree - he is toast - lame duck governor captured by the entitled.

If the restrictions were going to have an impact they probably still will. It's not like 10,000 houses are about to be built by FHBs @ 90% LVR.
If house price inflation does not abate it is National that is toast.

Dont see why, ie Im sure they'd love to rise.  More like they have mis-calcuated the impact and its way more severe than they expected and are doing CPR.
Lets see how the data works out over 3 months.
regards

Fantastic news. Common sense has prevailed. This will further encourage the government to unlock land use restrictions and hopefully start to bring down land prices. This amendment encourages supply while still preventing the haves from keeping out the have-nots.

There are only 2 ways to see price drops (assuming no housing price collapse for a moment)
a) Un-restrict land on a scale that is so large that the land bankers cant corner the market. . Its probably the only way to do it without huge nashing of teeth, unlike b). We'd then I assume get building furtehr out and we'd see commute times and fuel costs hurt the buyers.  Also thes younger buyers seem to want to live in the "nice " areas close to town...kind of wonder on how effective it would be.
b) Compulsory buy the agri land and re-zone and parcel it afterwards.  This allows small builders "free" access avoiding "developers lockin" as might happen under a).
The problem really is how do you provide the infrastructure.  IF its for a "super village" you could MUD it but if you want competition ie small builders building then again it has to be opened up somehow, I cant see how you do that with a MUD.
Though it would be interesting to see it in action...it would be very funny if it worked out not significantly cheaper.
The other thing is really we are short of FHB and lower income housing and yet the market/builders have said there is no margin there so wont build them.
regards
 
 

Supposedly the aim of the LVR was to reduce bank risk. New builds are riskier than buying an existing house; things go wrong. The purchaser is also more likely to ask for more money as budget's get blown. This exemption makes no sense at all.

Dead right....and if this happened under labour the NATs would be crying foul for sure.  Hypocrites

Of course you can't Oily. Prices will double in the next few years!!! Or is it prices will plateau soon. Or is it that they would have plateaued anyway without LVR restrictions?
Whoknows, whocares, can't go wrong! Prices to 12x income!!! Equity mate, equity!

Everyone is so worried about land prices.  Firstly the current price of land is based on a bubble in the housing market. There are always a supply of greater fools until there aren't.  Once the bubble bursts property prices will drop to their "real" value whatever that is.  3 x income seems like a number bandied about, even if most people can't get their head around what under writes our income.
Let's assume we do open up more land.  How many doubling of petrol prices before people can't afford to pay the fuel costs to commute?  I would suggest not many. 

When the majority of people on this site start agreeing with me I will know I'm in trouble

Halving the average property price would free up $1500/month. That would buy a lot of petrol.
 
Better to be at 3*income when we start the descent.

What an unbelievable cock -up this whole thing is turning out to be .
 

And why do you think that Mr Boatman? Nothing wrong with tweaking policy.
The alternative is to ignore reality and stubbornly forge ahead on the wrong path.

Quite simply my good freind , its called UNINTENDED CONSEQUENCES .
The idea that the RBNZ should be trying to manipulate the free market in secondhand  houses was dumb in the first place. 
It was always going to have unintended consquences , and this sudden change is a direct result of  an uninteded consequence of the LTVR impacting on the construction sector.
There is no other explanation  

There is fear in investor's comments on this page. Who knows why with news of another month of record house prices? Could it be the policy might actually work.
Here's a free housing market for you:
- No restrictions on land use WHATSOEVER.
- No obscene council development fees.
- No tax advantage for speculators over FHB/owner occupiers.
The non-free market thing that needs to be done is banning foreign (not immigrant, foreign) speculators.
The UNINTENDED CONSEQUENCES of this non-free market housing system we live in are that ordinary New Zealand's cannot afford to purchase a house. It was a great idea by Wheeler and long may it stuff property speculators.
 

Could you please clarify:
 
"- No restrictions on land use WHATSOEVER."
Would you be happy with a nuclear reactor, abatoir or Dharavi built next door to you or do you think some restrictions are reasonable?
 
"- No tax advantage for speculators over FHB/owner occupiers."
What is this tax advantage? Speculators must pay CGT (I know one that spent time incacerated for not).
 
 
 
 
 

Bob, absolutely there should be planning rules and restrictions, I was disagreeing with the description of the property market being a free market.
By tax advantage I was referring to deductibility of losses.

Certainly for speculators it is. A monumental misallocation of capital (or debt more like).
 

Has anyone noticed Graeme wheeler has put his foot in his mouth in the question and answer section around this construction loan exemption. 'First home buyers make up a much larger percentage of high LVR loans than investors'.  That's why he was never going to exempt first home buyers.  First home buyers were the target all along. Only 1% of total residential lending is to new construction loans so won't even have an impact. So we have a government who couldn't give a rats about its hard working citizens, is happy to let the rich get richer, overseas investors to buy up the country, the haves that have already got property to buy more and more, and will sit back and twiddle their thumbs while the reserve bank puts in place measures knowing the only people who will be affected are all the young people trying to get ahead in this country. The only ones that now have a hope in hell are those with parents wealthy enough to help them out. Keep the poor poor it seems. Median income in Auckland $29,400. Median house in Auckland nearly $600,000. Thanks National government , you are doing a wonderful job of setting New Zealand on the path to a manorial system of lords and tenants. I thought that's what early settlers were trying to leave behind.......

This is the fastest turn round that i have ever seen !!
 
It is really dissapointing that RBNZ caved in so easily . The policy is barely half a year old and yet we are certain that the policy is bad ?? If this is how Central Bankers make their decisions, no wonder the world is in such a monetary and economic shit.....
 
I suppose keeping your job is more important than doing the correct stuff ....

We had the Greenspan "Put"...   now it is the Wheeler....  " handbrake wheelie".
Wheeler seems like a pragmatic sort of guy....  or maybe not....   maybe he is a "soft touch"..
Will be interesting to see when he moves on the OCR....?????  
In regards to House prices... hes' between a rock and a hard place.
In regards to banking system stability....   it is the purpose of his job.
 
 

So many questions come to mind .
I assume the RBNZ has among its ranks some economists who were consulted when the dumb idea to try and distort and manipulate the free market in secondhand houses was first mooted ?
If so,  one  is left wondering where they studied economics , Soviet Russia maybe ?
Did I not raise the prospect of unintended consquences of trying to manipulate markets months ago when the LTVR issue was first raised ?
Now we a whole set of sub-rules requiring management and monitoring and enforcement  , because "new builds" does not include " new houses " built by developers.  
On the topic of INFORMATION ASSYMETRY... What does Wheeler really know  about the market that he is not telling us.?
So what has changed in 10 weeks ?  
How can they go changing the rules before we even understand them , and know what effect they are having ?
We have inflation in the construction sector and inflation due to oppotunistic pricing in the building materials sector ,  a shortage of craftsmen and a shortage of land .
In light of this , the only real question is WHY ?
 

I think Wheeler 'studied' in the US, just a few years ago. I suppose he could have studied somewhere like Ireland or maybe Spain.
Perhaps he should have just let this baby run!!

Yes they do. They studied in NZ. They possibly aren't as aware of the Auckland market as they might be. They possibly see this as more of an experimental sort of thing rather than expecting a certain definite outcome.

This move by the RB is total nonsense.
It blows a hole through the whole idea and is even more unfair than ever.
Why should people with small deposits be forced to buy new properties usually out in the sticks when used houses could well be the same price (no GST) or even cheaper?
Olly Newland's double shot interview only last week on this site made the very point and as usual he was spot on.
This is an idea that has the wheels falling off it as Olly predicted.
Nuts!

The spruikers and ticket clippers are sounding increasing worried.
This is an excellent sign.
Keep it up Mr Wheeler.
Next on your list; maximum 70% LVR for investors and speculators.
 

I love Olly's predictions. Prices to double in next few years! Prices to plateau soon! Prices would have plateaued soon anyway! A broken clock is right twice a day. It's always a good time to buy property when your business is to advise on purchases and your investments are in property.

Property prices double every seven years*.
*Warning - past performance is no guarantee of future returns.
Good on you for seeing the potential there. My argument is that your properties probably won't be worth $1.2m by 2016 (which is roughly what Olly suggested about 6 months ago). Or $2.4m by 2023. Or $4.8m by 2030. But you never know.

The RB's restrictions' bye-bye
Those FHB's now can let fly
Their hard-earned dolleroes
On banged-up rancheroes
And get to pay banks till they die

Interest.co.nz covered the poverty costs of unaffordable housing almost a year ago. The link is here.

Hugh, I look forward to the next "Nellie" to pitch her next tent right at the doorstep of the Christchurch City Council and for the Council to find another "rare find" to rent it to her.
 
It seems the only way we can solve our housing problems in New Zealand is to make our politicians look like fools.....
 
The Occupy Movement has something going after all except they should have pitched one tent at a time....

At least Olly makes predictions straight from the shoulder which are more often right than wrong.
And most of his predictions are based on common sense from hands on experience over decades in the business,
I  would rather believe him, than the rantings and political biased mumbo jumbo with which Hugh Pavletich clutters up these pages ad nauseum.
 

I  would rather believe him, than the rantings and political biased mumbo jumbo with which Hugh Pavletich clutters up these pages ad nauseum.
I disagree...  Why be so disparaging..?? His message is important.
 It is from Hugh that I first learnt about supply constraints and land prices as a result of Local Body ideologies..... I don't agree with everything Hugh says.... but respect him for the time and effort he puts into this.
Most of us just work in our own self interests..... and we all love a rising property mkt.
His cause is more "social justice"....  whereas Olly is all about the "game"....... and I also have lots of respect for Olly ... He has lots of experience and wisdom when it comes to property investmennt ...
 
 
 

I think Hugh's motivation comes from a sense of fairness. This might be hard to see due to his style of writing and right wing political leanings but I believe he is more concerned about the wider society than any individual gain.
 
Big Daddy/Olly motivation seems more self centred....

Social problems of any kind can only be solved with practical solutions and solid pragmatism.
Airy-fairy rants and catch phrases e.g. "mortgage slavery" and "the haves and the have nots" etc  etc are merely empty rhetoric.
If there are any problems then rolling up sleeves and doing the actual work is what's needed.
Sniping from the trenches is the shield of the lazy.
Hugh spouts a lot, but does he actually do anything other than spout?
 

I think big Daddy you protest to much . It is clear the last thing you want is genuine practical measures that would gradually return housing affordability to our long term equilabrium of three times medium income.... Maybe because it would start a decade long process of capital losses to reverse the gains of the last decade ....

On 25th July Olly wrote an article here about 10 ways to get around the LVRs.
About 1 or 2 made sense to me; including parental assistance.
A good example is the Westpac family springboard product.
 
It now appears most of these "this is how we did it in the 80s" ideas are no longer either possible, relevant, practicable or sensible.
 
My.....what a surprise.
No wonder some people are worried.
 
Bring on maximum 70% LVR for investors and speculators.

Is OilyN BigDaddy who is Olly Newland?

Yup! Borrowing money to top up a deposit won't cut it now. The banks want evidence that the money is genuine savings or a gift. If these measures had been in place for the last decade there would be no property boom. Property would just be boring old accomodation and not the cash printing machine it has been for some.
Bring on the crash!
 

OllyN is NOT BigDaddy or Olly Newland, just someone taking the p@@#

Sorry this is confusing who is taking the p@@#, OllyN, OilyN, BigDaddy or Olly Newland?

If you can assert with such certainty that OllyN, is NOT Olly Newland, then may i ask how you know that BigDaddy? Telepathy perhaps? Or did you ring Olly and ask him?

Hugh, they do "get it". Well at least the vested interests do. They know house prices shouldn't be this high and that one day it'll all come crashing down - but they don't care. There's plenty of money to be made, who cares if it wrecks the economy eventually or saddles the next generation with extreme levels of debt?
On the other side are the general public, who probably don't get it. They have a vague sense that houses are a wee bit too expensive, but hey their house earned more than they did this year! Let's do a quick mortgage equity withdrawal and enjoy a holiday to Thailand - and a new car! Awesome, life's good.

A scary read.. come 2020 I think you could replace Ireland with New Zealand in that article.
 

To KiwiPete at the top of the comments - to you Sir I say ... well said! That is eactly the way us native Aucklanders feel. Also, those old days of cheaper houses relative to incomes and less population may return again (sooner than many of the spruikers think).

For the avoidence of doubt, Big Daddy is Olly Newland.
OilyN is someone taking the mickey.

Holy crap! They are all coming out of the woodwork now. Don't tell me you are actually Olly too, Mr Landlord, that would be just too much!