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ASB economists say effect of LVRs on house prices likely to be at low end of RBNZ estimates

ASB economists say effect of LVRs on house prices likely to be at low end of RBNZ estimates

The impact on house prices of limits on high loan-to-value lending is likely to be at the low end of the Reserve Bank's estimates, according to ASB economists.

ASB chief economist Nick Tuffley, along with economists Christina Leung and Daniel Smith, prepared a special "Economic Update" giving an "initial assessment" of the effects of the LVR restrictions, put in place by the RBNZ as of October 1, 2013.

The economists noted that the RBNZ had estimated its LVR 'speed limits' would likely reduce house price growth by 1-4 percentage points and housing credit growth by 1-3 percentage points.

"The muted response to date of the housing market and credit growth suggests the impact is more likely to be at the lower end of the RBNZ's estimates," the economists said.

"Other factors such as rising interest rates and increased building will remain the dominant drivers of the housing market."

The economists said their initial assessment of the impact of the high-LVR restrictions suggested the restrictions would have had "some success" in reducing damage to the financial system in the event of a housing downturn "but haven’t materially reduced the probability of a house price overshoot that leaves the housing market vulnerable to a sharp downward correction".

Tuffley, Leung and Smith said that housing demand had eased in recent months, but the impact on house prices had been muted.

Nonetheless, they said, there had been "a noticeable shift" in new lending patterns, with the sharp decline in high-LVR lending largely offset by an increase in lending to households with at least 20% deposit.

"Given the RBNZ had highlighted the risk high-LVR lending posed to banks’ balance sheets in the event of a housing downturn, this change in the composition of new lending suggests the RBNZ will conclude some success in improving financial stability."

The economists said that while there had been some volatility in the market, as usual, over the holiday period, "the overall sense is that the market is cooling a little".

"The REINZ stratified house price index (taking a three-month average to look through volatility) suggests that price growth peaked at around 17% p.a. in Auckland in around August last year – prior to the announcement and implementation of the LVR restrictions. Since then the annual rate of appreciation has eased to around 13%.

"Price growth at the national level looks to have peaked at around the same time, at around 10%. And once we seasonally adjust the index, January was the first month since April 2012 in which prices decreased at the national level – the index was down 0.3% from December."

They said indicators such as the number of days taken to sell houses - now increasing - suggested that a "gradual moderation" in price growth would continue. They said increased building activity would start to alleviate some of the supply pressures in the market, while they also expected that as the "conservatism" of potential house sellers in the wake of implementation of the LVRs waned, more houses would come on to the market.

"We expect house price inflation will ease over the coming year from the current annual growth rate of around 10% to around 6.5% by the end of the year."

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Nonetheless, they said, there had been "a noticeable shift" in new lending patterns, with the sharp decline in high-LVR lending largely offset by an increase in lending to households with at least 20% deposit.
From this I think of two possible scenarios:
1) Loans that would previously have no cross-securitisation and be recorded as high lvr are now being taken out with cross-securitisation making them technically low lvr.
2) The rich get richer, the por get poorer. Those with nothing have to stay that way whilst those with property can use that as equity to buy more property and on we go.
This reminds me of a problem I hear from new immigrants. They tell me "I can't get a job because every job requires me to have NZ experience. How do I get NZ experience if no one will give me a job?"

As long as the governing financial system doesn't collapse – protecting savings; that what matters.
People always find a ways to obtain some one elses money; if their eyes are bigger than their stomach, then thats their problem.

The success or otherwise of the LVR restrictions should not be based on it's effect on housing  demand, house pricing nor it's ability to prevent an over-heated market. All of thise things may be by-products of it's primary intention and that is to lessen the effect to the economy should house market collapse - and almost by definition that has to have happened.
And the banks have over-reacted to the new regine - they're only loaning 3.7% (of a potential 10%) of loans with LVRs greater than 80%
So the banks have effectively held back two-thirds of the potential low deposit mortgages - that's not the RB's fault, that's the banking industry being overly cautious. There could be triple the number of successful first home buyers if the banks manage their loan book more accurately.
And the other point that needs to be made - most of the drop in housing demand that could be attributed to the LVR regime will only be temporary. Those with less than 20% deposit now will just drop out of the market for a period until they've saved more of a deposit. Admittedly some may be put off permanently, with the thought of having to save a lot more money, but in general, after 5 (?) years the effect on housing demand that could be blamed on the LVR restrictions will be minimal.

 that's not the RB's fault, that's the banking industry being overly cautious.
It's almost miraculous. There has to be more to the story. Why have the banks wound back high lvr loans so much? 

I will tell you why high lvr loans have pulled back so much - banks have stopped waiving low equity fees like they were this time last year, and for low deposit buyers interest rates have gone up 1.5%. If we took out a loan last year and fixed for 3 years it would have been at 5.75%, now it's 7.25% and there is a $4,000 low equity fee to pay on top. NZ has got it oh so wrong. If you are an investor you can get the really low interest rates, whereas first home buyers are screwed with the higher rates. If you went to ireland only owner occupiers are eligible for the lower residential rates, property investors pay the 0.5% premium. There's a thought for the government - enforce a 1.0% premium for investors and don't charge a premium for owner occupiers. It would reduce demand overnight and make housing more affordable for New Zealanders.  But this government doesn't care about  policies that help families or young people get ahead. They just want to pay out working for families and accommodation supplements that end up being paid in rent to their cronies and the baby boomers who are "buying an investment property to fund their retirement".

They don't need to charge such high fees/rates on low equity lending. I'd expect them to keep low lvr lending at around 8%. It looks like the banks are setting the effective percentage of low lvr lending, not Mr Wheeler. This isn't surprising. What's surprising is that they are setting it so low.
I don't agree with increasing the cost of business to landlords. 
We're not all baby boomers. I don't really expect there to be much if any state pension when I'm retirement age and property is one part of a diversified investment portfolio I am building. Is this wrong?

Yeah so maybe they will calibrate the fees and extra interest in light of these numbers.  I.e they want to get more 20% deposits, but there cuirrent set up has them getting over 95% at 20% or more so a little over cooked.  Will probably want to ramp low lvr up to 8%, i.e almost double what they are now.  If this means lowering rates or low equity fees to get them back, they will do so.

Tip: If looking to buy at under 20% try your luck with a bank this month... they might have a shelf full of stock they are looking to move

Nope, not happening. Just phoned two banks and the reply was come back when you have a 20% deposit. They are only lending to existing customers with existing mortgages who want to top up. There are no first home buyers out there in the market without a 20% deposit.