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.
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."
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.
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.