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Adding low equity loans on new house builds to exemptions from lending restrictions not a back down; Not planning further changes to the policy, RBNZ Governor says

Adding low equity loans on new house builds to exemptions from lending restrictions not a back down; Not planning further changes to the policy, RBNZ Governor says
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By Gareth Vaughan

The Reserve Bank's decision to exempt high loan-to-value ratio (LVR) mortgages on new house builds from its "speed limits" on high LVR lending wasn't a back down, Governor Graeme Wheeler says, and the Reserve Bank's not considering any further changes to its LVR restrictions.

Meanwhile, Deputy Governor Grant Spencer says the Reserve Bank believes banks are respecting the spirit of the restrictions, and is happy with the response of banks overall.

Speaking at a press conference after the December Monetary Policy Statement was released,  with the Official Cash Rate again held at 2.5%, Wheeler said the Reserve Bank was pleased to be able to "adjust the policy" having had feedback from the building industry and banks that was different from the feedback it had received during consultation on the LVR restrictions in July.

In an unexpected u-turn on Tuesday the Reserve Bank announced new residential construction loans would now be exempt from the LVR limits, with the exemption back-dated to the start of the restrictions on October 1. However,  low deposit lending on "spec" houses is not exempt.

The Reserve Bank announced on August 20 it was introducing high-LVR "speed limits" from October 1. Banks will be measured on them from March 31 next year. They mean banks must restrict lending at LVRs above 80% (where borrowers don't have a deposit of at least 20%) to no more than 10% of total new mortgage lending. Aside from new residential construction loans, this 10% limit excludes high LVR 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.

'A sensible thing to look at the issue again'

Wheeler said when the restrictions were introduced, the Reserve Bank wanted to keep things as simple as possible to reduce the potential for distortions and unintended consequences. It was conscious that high LVR construction lending is only around 1% of total residential lending.

"So if you take total mortgage lending it's roughly around $4.5 billion a month so high LVR construction loans were probably about $45 million a month," said Wheeler.

"When we talked to the banks during the consultation period in July, we didn't get feedback that this was a significant issue. And when we consulted with the building industry we also didn't get feedback that this was a significant issue. And we felt the banks could potentially meet this demand from within the 10% speed limit," Wheeler added.

Reserve Bank officials have been watching building permits statistics, which have been picking up strongly and are now about 50% above the trough in 2011, he said.

"So we put all that together and said 'let's proceed with as simple a system as we can.' And then we got feedback from the building industry, which was very helpful, and also some of the banks themselves started talking about the issue. And we felt it was a sensible thing to look at the issue again particularly if this would increase the potential (housing) supply response."

"Now how significant will it be? It's hard to say. We think it's possibly 200 new builds a month. You've got new housing permits running at 20,000 a year, so if you've got 200 a month it still adds up to roughly about 12% of total new builds," said Wheeler.

"So we were pleased to be able to adjust the policy having had the feedback which was different from the feedback we got in July."

'No more changes'

Asked whether the Reserve Bank was considering any further changes to the LVR restrictions Wheeler said: "No we're not."

And asked whether the Reserve Bank is comfortable that banks are abiding by the spirit of the policy, Spencer said the short answer was yes.

"We think the banks are observing the spirit of the restrictions," said Spencer.

"There's going to be some flows around the edges, there's going to be some pick up in unsecured lending, and there's going to be some pick up in sub 80% LVR lending and that was expected," Spencer added. "And we wouldn't see that as avoidance of the restriction."

"We're happy with the response overall."

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Why did they poke their noses into the market for secondhand houses in the first place ?

Now they have had to deal with the first unintended consequence , (and there will be more) of their interference  by changing the rules in a mere 8 weeks  since they were implemented .

So  the RBNZ is  left with having to monitor, manage and enforce an ever increasing  complex set of rules, subject to change in 24 hours,   on new lending, debt levels and ratios in an environment of fast changing levels of prices.

This is both a waste of time and resources .

Their heavy- handed actions and sudden change create uncertainty

We now know that any strong lobby can get the rules changed , which will cause mre uncertainty , and more unintended consequences

My obesrvations are :

  • The market will do what it wants anyway , irrespective of what monetary and fiscal authorities want .
  • Their actions are avoiding the real problems  , there has been nothing to address the supply side of the equation. 
  • There is no certainty if the RBNZ can change the rules in 24 hours , and makes the first change in 8 weeks since inmpelenrtation
  • the LTVR rules discrminate against young Kiwi families
  • It favours migrants who can borrow offshore at 3%
  • The price increases were in Auckland only,why hammer the whole country?
  • There is no evidence of a speculative bubble in secondhand houses  
  • Wheeler is on record as acknowledging that the causes as being low interest rates and demand for shelter by migrants .
  • There is a price level at which the market is cleared or new paleyrs enter the market to meet demand .

Whether Wheeler or anyone else likes it or not,  prices wlll increase to a point where builders and developers will enter the market to meet demand .



No amount of jawboning can resurrect reputations torn asunder by the edicts of expediency.


From Shamubeel Eaqub, the principal economist at the New Zealand Institute of Economic Research:


#10 But the latest change of policy on LVR speed limits (number 9), suggests that perhaps their communication strategy is still in its infancy. They put forward a framework for why they are implementing the LVR speed limits, but did not explain the change in policy using the same frameworks. The way thay I read it, the RBNZ is essentially saying that high LVR mortgages on new homes are less risky than on existing homes. It’s like a Tui “yeah right.” billboard. Seems like the RBNZ’s communication is about leaving a lot unsaid, rather than accountability and transparency. Read more


So, whose economic theory  does Wheeler trust , Robert Shiller or Eugene Fama ?

Both won (and now  share)  the Nobel Prize for Economics last night,  but they are poles apart in their theories.

Shiller believes in bubbles , herd mentality  and psychology when explaining markets rises and falls .In other words he sees relative unstructured chaos.  

Fama postulates that markets are efficient and there is a price at which the market clears and that price is always right at the time . The price may mot be right at some later stage due to changes in supply or demand or other determining facotrs .

Fama sees more order , rationality and efficiency in markets

I tend to agree with Fama , here's why ;

The price of any  house in Auckland sold at auction is the right price ( clearing price ), based on

  • Known values and full information
  • Many informed buyers and sellers
  • No restrrictions or exclusions
  • Little or no government interferance ( until LTVR)
  • A known shortage of land  (supply and demand)
  • Opportunity cost interest rates so low as to make it cheaper than renting
  • A growing migrant population  

This does mean that the same price will be the right price if we suddenly

  • Made 10,00 new sections available
  • Stopped all inward migration tomorrow
  • Mortgage Interest rates doubled to 10%
  • Restricted foreigners from buying land
  • The NZ $ lost 20 %+  value 

These would be game changers , and the price paid yesterday would no longer be the clearing price .