There is "nothing inequitable" about regional housing markets suffering because of the Reserve Bank's 'speed limits' on high loan-to-value lending, according to BNZ chief economist Tony Alexander.
In his latest Weekly Overview Alexander said arguments for regional implementation of the LVR rules "do not hold water".
"In fact, given that the only shock likely to cause a huge decline in NZ house prices is something like foot and mouth disease, the chances are that the regions would suffer far greater house price declines and negative equity positions than Auckland in particular."
Both before and since the LVRs were introduced by the RBNZ in October there has been debate around the country about whether they should have been regionally targeted - with emphasis given to markets such as Auckland that were perceived to be overheating.
The RBNZ ruled out specific regional targeting of LVRs, saying it "would be administratively complex, and would require difficult decisions to be made defining ‘problem’ areas".
Professor Mark Skidmore from Michigan State University's department of economics, in a paper prepared for the NZ Treasury, has recently refuelled the debate about more specific targeting of LVR restrictions. "In particular, given that Auckland is the only region experiencing rapidly rising housing prices driven by population growth, it may be prudent to consider a targeted response as opposed to a nationwide response such as the loan to value speed limit (LVR) policy recently adopted by the Reserve Bank of New Zealand," Skidmore wrote.
But BNZ's Alexander said it was "time that a certain very un-PC truth" was told about the impact of the LVR rules.
"They were not driven by specific concern about the Auckland housing market and there is nothing inequitable about regional housing markets suffering because of the rules," he said.
Alexander stressed that the RBNZ had aimed to do is limit the exposure of bank balance sheets and therefore the overall economy in the event of a shock which caused house prices to fall precipitously and cause borrowers to face negative equity.
"Think of that shock as being a foot and mouth outbreak.
"In the event of such a thing house prices will fall everywhere as the economy shrinks by some huge amount. There is little reason for believing that Auckland house prices will fall more than prices elsewhere."
In fact, Alexander said that examination of house price changes between late-2007 and the nationwide average bottom early in 2009 the biggest declines were recorded in Southland, 12%, Central Otago 10%, Nelson 8%, Canterbury 7%, Otago 6%, Waikato and Northland 5%, and then Auckland 4%.
"If lots of people have borrowed with 90% debt in Napier then lots will have negative equity should prices fall 20%. If lots have borrowed with 90% debt in Auckland and prices fall 20% then again lots of people will be in negative equity positions."
The fact that "so many people" were "bemoaning" the large impact the LVR rules have had in the regions "tells us that there are lots of people, proportionately speaking, who buy houses with low deposits outside of Auckland and Christchurch".
"There is no moral superiority in the argument that regionally-based young buyers are either disproportionately affected by the rules or affected when they should not be. They are just as much (in proportion to population probably) a part of the negative equity bank capital base risk that the Reserve Bank is trying to mitigate as the young buyers in our two largest cities," Alexander said.
Arguments against the LVR rules needed to be couched in terms other than "alleged but unproven disproportionate regional impacts", he said.
"A better angle is, as we have been highlighting, the disproportionate impact on first home buyers compared with foreigners and investors all around the country.
"In that regard again the regions fare better than Auckland given the lesser influence of now newly-favoured foreign buyers in those non-Auckland markets which traditionally attract less interest from people offshore."
9 Comments
While FHBs in the regions don't have to compete with foreign buyers, they are more likely to have to compete with investors, in particular, Auckland investors who have just seen their equity increase 30% + over the last few years and are seeking higher yielding properties with greater exposure to dairy income. Regions historically lag auckland price moves, so investors are moving into the regions now to ride the 'ripple effect' or 'catch up' effect; so they get property with better yield and better capital growth prospects.
Considering the welcome home loan price caps for most regions is 300k, which in the secondary cities actually buys an above average house, I can't see why first home buyers would be suffering (yet). My guess (from personal experience helping out a relative into his first home) is most are unaware of the welcome home loans as they belong to one of the major banks that dont provide it.
Any argument of inequity between regions should be the other way around, given that Aucklanders need to save at least $100k versus $50k or less in the regions.
What people need to get their head around is that it is not LVR restrictions that prevent people buying houses, it's the high prices that prevent people buying houses. Debt has to be paid back - it's not a hand-out.
Debt-fuelling is essentially enabling, in that it enables 2 bidders to bid higher and higher against each other to the point of personal debt-slavery for the next 30 years.
I agree.
And Tony A agrees too. In last weeks newsletter he was talking about price rises spreading outside auck and chch, and mentioned auckland would be effected the most by the LVR limits due to how high prices already are there.
The size of the 5k govt. grant, and the size of peoples kiwisaver that they can use for deposit is similar for both auck and regional buyers; For most secondary cities, these combined gets a FHB very close to the 10% needed to buy a home under the welcome home loan scheme (and thats an individual, a couple should have no worries getting the 30k needed to buy an above average 300k house in a provincial city; 10k granted (req. both in kiwisaver for 5 years), plus 10k each employer and own kiwisaver contributions. No actual saving required.
Same property in auckland would be 600k, outside the welcome home loan scheme, and requiring 120k saved; 10k granted, bigger incomes so say 15k each from kiwisaver (assume 50% bigger income), gives them 40k, still 80k short. Obvious who's got it tougher, and obvious where future price appreciation is likely to occur.
Perphaps an example of how the banks consider themselves.
No mention of the agency conflict, they over lend, we pick up the wreckage.
If banks have unshakeable faith in property, let them bear the risk....
As it stands it is the bank that determines which lender can have a low deposit loan. The rbnz does not select identy of borrower.
We suggest banks see commercial advantage to service (in a farming sense) those good folk of Auckland, rather than the regions...
The idea is to impact the FHBs as they are the start of the chain. Take a decent % of these FHBs out and the sellers cant leverage up or up as much, thus reducing the snowball effect....
So when TA says we dont want to hit the FHBs, either he's not as bright as some ppl think he is, or he's doing a slight of hand to benefit his employer.
regards
I think there is a very good argument for tailoring LVR restrictions to post codes and it revolves around the disparity between rsing house prices in Auckland and flat rents.If there is no actual shortage of houses just a drive by investors to own property because of expected capital gains, surely the biggest risk to the banks must be in those areas with the lowest rental yields. A town like Masterton rents at about 6.5%.. $200,000 house rents at about $250 per week. There is some sort of relationships between Wairarapa prices and Wellington prices as there is a fairly comfortable commute. It is hard to see any event occuring which would leave banks much out of pocket on 90% lending in Masterton.
Large chunks of Auckland must be renting at about 2%. All it would take is for investors to realise that there will be no growth in values from here and a tick up in interest rates to make their holding costs uncomfortable for the banks to take some big hits on any loans over 80%.
If the purpose of the LVR restrictions is to protext the stability of the bankinfg system they should be applied in those areas that present the biggest threat.
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