RBNZ seen potentially introducing another macro-prudential tool to try and rein in housing market building a new head of steam

RBNZ seen potentially introducing another macro-prudential tool to try and rein in housing market building a new head of steam

By Gareth Vaughan

With the Auckland housing market showing signs of building up a new head of steam, Reserve Bank Governor Graeme Wheeler may dip into his macro-prudential toolbox in 2015 and bring out another tool to help his restrictions on banks' low equity mortgage lending cool the housing market.

This is the view of John Bolton, principal of Auckland-based mortgage broker Squirrel Mortgages.

Bolton told interest.co.nz in a Double Shot interview the Auckland housing market has picked up, and picked up reasonably significantly, since October.

"I think we're going to have a strong summer. You're already starting to see that coming out in some of the statistics in terms of record house prices etc. There is a lack of property on the market, that's going to continue for a while yet," said Bolton.

"You've got a degree of confidence there in terms of the buyers, you've got investors that have got fairly significant capital gains in their portfolio. It's a bit of a drug really and maybe just another property, maybe just another two, so you're going to see all of that in the market."

"You're going to see first home buyers that are probably a little bit fearful of missing out and the market getting too far ahead of them. We're certainly seeing more activity in that first home buyer market now," Bolton said.

"The real risk is more money coming in from offshore. You get all that back in the market and I think we'll see a repeat of 2013. A real kicker with a lack of listings, a lack of supply, lots of demand, and probably a bit more price appreciation."

'There's only so much debt you can borrow before it becomes a problem'

Bolton suggests debt servicing is increasingly becoming an issue for borrowers.

"There's only so much debt you can borrow before it becomes a problem. And the unfortunate situation we're in is the Reserve Bank's kind of stuck with its ability to put interest rates up, which is why I think you'll see more macro-prudential tools coming in next year," said Bolton.

In a consultation paper issued in March last year the Reserve Bank suggested it could implement more than one of its so-called macro-prudential tools simultaneously.

The Reserve Bank introduced a "speed limit" on banks' high loan-to-value ratio residential mortgage lending from October 1 last year, meaning banks must restrict lending to borrowers lacking a deposit or equity of at least 20% to no more than 10% of their new lending flows. Earlier this month the Reserve Bank indicated the LVR restrictions will remain in place for some time yet due to the risk of resurgent house price inflation.

Here's what the Reserve Bank said in its consultation paper last year; "In some cases, the optimum response might involve using more than one (macro-prudential) instrument. For example, during a credit boom it might be appropriate to not only constrain the build-up of leverage in the banking system with the countercyclical capital buffer, but also to target high risk borrowing more directly (eg through the use of LVR restrictions)."

Aside from LVR restrictions, the Reserve Bank has three other macro-prudential tools in its toolbox. They are; the countercyclical capital buffer, effectively banks holding more capital during credit booms; Adjustments to the minimum core funding ratio, altering the amount of retail funds and longer-term wholesale funding banks have to use. And; Sectoral capital requirements, or increasing bank capital in response to sector-specific risks. See more on all four tools here.

'Close to a sure bet'

The latest Real Estate Institute of New Zealand monthly figures - for October - put Auckland's median price at a new all time high of $640,500. At 2,457 October's sale volume was up 7% from September, albeit down 8% on October 2013. Trade Me Property figures show Auckland residential property listings down 10.5% year-on-year. Meanwhile, the latest Statistics NZ figures showed Auckland residential building consents falling.

Against this backdrop, and with mortgage rates falling and migration inflows at record highs, Westpac chief economist Dominick Stephens recently suggested "a resurgence in the housing market is not just a risk - it is close to a sure bet."

Bolton said after a cautious flavour to the Auckland market for much of 2014 with the impact of the LVR restrictions kicking in from February-March, the prospect of higher mortgage rates, and September's election looming, activity has picked up since October.

"And it has picked up reasonably significantly. My concern at the moment is that we get a second head of steam on in this market. If you think about the drivers we've had the new (council) valuations come through, which has kind of banked those gains that people thought they were making over the last two or three years. It has been really interesting to see the psychology of people having those increased values now showing up on their rates statement. That's a part of it."

"Another part of it is we've clearly come out of it with a clean election result. (That's) probably good for the economy generally, but frustrating for people who want to see the property market stay in some sort of control," said Bolton.

'Kiss goodbye to any notion of the LVR restrictions disappearing'

On top of this fixed-term mortgage rates are falling and the there has been a significant easing in the interest rate outlook. After the Reserve Bank increased the Official Cash Rate (OCR) four times by a combined 100 basis points to 3.50% between March and July, most economists now don't expect a further increase until late 2015 at the earliest. Earlier in the year economists were forecasting another 100 basis points of OCR hikes next year, lifting the OCR to 4.5%, the level the Reserve Bank views as neutral.

"It would be fair to say now that it looks like interest rates will stay around this level for at least another 12 to 18 months," said Bolton. "And that change in the interest rate forecast, I think, is certainly giving people a lot more confidence to potentially get out there and buy a property."

"With the softer interest rate forecast I think you can pretty much kiss any notion of that (LVR restriction) disappearing goodbye. It's working well in a fairly benign interest rate environment," said Bolton.

The Reserve Bank also has residential property investors in its sights as it moves to make banks hold more capital against loans to owners of multiple rental properties. The Reserve Bank is proposing a separate asset class of residential property investment and trying to get consistent treatment across the banks. This could make loans more expensive for property investors, and potentially harder to obtain.

'A servicing based calculation makes sense'

Reserve Bank Deputy Governor Grant Spencer says categorising a borrower as a residential investor could be based on the proportion of their total income that's sourced from their investment portfolio, rather than just the number of houses they own.

"As far as property investors are concerned I think the number of properties thing clearly wouldn't work, there's too many ways around it and we'd just create an industry that spends its time trying to get around the rules. Borrowers of convenience would be a particular example where properties are basically purchased in family members names to get around the numbers restriction," said Bolton.

"I think a servicing based calculation makes sense and would work particularly well. If there's an issue in the New Zealand mortgage market it tends to be around servicing. You'd be surprised how low the non-property related income is for a number of people that buy investment properties, and there is a degree of rent reliance there."

"So if the Reserve Bank and the banks generally increasingly focus on servicing, then that will certainly help slow that part of the market down," Bolton added.

A version of this story was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.

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.

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.

30 Comments

The double peak boom...

It's all good.  Didn't you hear JK mention while the chinese pres. was here- "There's ALOT more room for chinese investment in NZ before kiwi's start getting uncomfortable".
Um....Um....actually speechless.
 

And a cold chill ran down my spine

Afterthought - when Key was saying that I believe the look on his face was a "f...-I-can-say-anything-I-like" look.

0 zero zilch nada

Domain.com.au's regular weekend property auction report video
A random sample of last Saturdays auctions in Melbourne
Watch the buyers - they're overbidding and beating out the developers
http://news.domain.com.au/domain/real-estate-news/home-buyer-pays-468-mi...
 
quote: Bidding took a while to gain momentum, with one bidder following instructions from his father on the phone in China. endquote
 
That's either an overseas buyer buying an established residential property which is illegal, or the father buying a $5 million property for his international student son to flop in, which is legal

From Tony Alexander's weekly report
Keep an eye on Auckland in the coming year. The pace of price rises looks like it might accelerate as a new flood of Chinese buying is likely as the Australian’s are on the cusp of radically tightening the rules and enforcement of rules around foreign purchasing of established residential property
 
The implication being if the Australian door slams shut ... where is the nearest open door .. the Canadian door has been slammed shut, and, the USA has also shut its doors for the rest of the year because it's annual quota was filled some months ago - note - USA uses a quota system

Meanwhile we do f....all.
***shakes head***
Why I ask myself isnt the Govn being held accountable, I guess its because 51% of NZers think they are making money, and f*** the rest of you.
Sadly I just wish that same 51% is the % that pays, but it wont be like that at all.
regards
 

What are you suggesting?
Zero foreign ownership?
Can't see much else having an effect and its certainly not something any government might do... All that Immigration and money is needed for 'growth', the system has to grow. 
 

Yes eventually zero foreign property ownership. So no land banking by foreigners, bring in a land tax on properties not owned by NZers ie NZ passport holders or perm residence living in NZ as a start.
"the system has to grow" until of course it doesnt, then it collapses, ie the property bubble pops. As an aside we are on a finite planet, so we cant grow for ever tts only a Q of when.
Im not so sure on any Govn, Green's for one are heading that way I think and I wouldnt bet on Labour also going along.  My reasoning is really that the pain of lost votes (or the gain from the other side) will overcome their reluctance.
Of course when the property bubble pops then boy will there be some wipe outs.
 
regards
 
 
 

Caleb, a foreign owner is not an immigrant, they are two different things, and foreign owners do need to be out of the market.
I suspect that you too, understand that growth cannot be a forever thing and indeed we do need a political party that recognizes that and actually says so out loud.
People are still stuck on the idea that "growing" is the only way to prosperity and as everything thing gets bigger and bigger and economies of scale feature more and mroe in our lives then it will remain the only way to go.
If you are looking for an answer to it, start with the 70+ woman in Eketahuna with 7 cows making a living from cheese making from them. In there somewhere, I believe, lies the antidote to growth which is, basically, eating the planet.
The TPPA will just about set the ponzi scheme of never ending growth in stone.
NZ is in a bit of a different position to the rest of the world, looking relatively underpopulated by world standards, however should the human race reduce it's number to what the planet can sustain we would not probably be far off some sort of optimum number. So what have got, we have a government that thinks that it can stall facing this issue by grace of the fact that we have lots of room for Chinese investors (John Key the other day when Chinese pres was here). We are being sold a pig in a poke, I for one, am not buying, what about you.
 

.

Better kick backs and stronger government oversight in NZ.

...leads to a doubly bad bust.
About a year or so back when the property market started to ramp up and people seemed to be paying ridiculous prices for houses ie 100k-150k over CV, I thought ha ha this is going to sting some people especially those who were able to borrow at 95%. A year later there's no signs (yet) of trouble apart from for those that are wanting to buy a home.
I'm in lending, and now I'm convinced that we will not have a downturn in prices (in Auckland) because now that the new CVs are out people are still paying way over the CVs which have gone up something cronic. One of my workmates home has increased 77% in "value" cant wait to see the rates increase on that one... Thanks Lenny!
New Lynn property new CV $638k, asking price $899k, customer wants approval for $950k to make an offer.
Bubble? nah, just start conditioning our kids to be renters and to learn chinese to negotiate your rental agreement.

If you have real information that would lead to more knowledge about foreign buyers, then you should make it known, where it counts

raegun.
Please let us all know which agency is responsible for running the database on foreign buyers.
 

Very sadly, there does not appear to be one

Evidence- that's the hard part. I don't have the resource or access to the info that counts ie the REAL numbers of foreign ownership etc.
My proof and what convinces me is my daily experiences.
One of the signs for me is around the time for paying rates, regularly there will be one person(of particular decent)paying rates on multiple properties all owned by the same name, or "company". The most one person had was 15 properties. Average around 8 properties. This isn't just 1 or 2 people in a day I'm talking up to 10.
10 owning 80 to 100 properties? Something is wrong with this picture.
I will try to be more restrained with my "slanderous" and "racist" remarks as steven has pointed out.
take care rg.

That would imply that you operate in the front-office part of the back-office section of the rates department, observing the passing parade of payments coming accross your desk
 
That's not anecdotal evidence, it's first hand evidence

Yeah, I saw that
Since when is truth slanderous and racist - dont worry about the finger-waggers

Well, exactly.  I see my comment has been removed now anyway.
I feel like truth tellers/ people that tell it like it is are being discriminated against. I want it reported!!
 

Whistleblowers are seldom popular with people with power.  Facts and direct observations are even more unwelcome.

Learnt that years ago in marketing, and then in studying religion.

Many people and managers love statistics and reports.  the can be fudged and explained away.  Just like my MP found it convenient to call me a racist and therefore he felt he could rightfully ignore my complaint when I emailed him concerned that Land belonging to NZ's children and our future was being sold "beads and blankets" wise to foreign companies.

He couldn't ignore the fact that our future was definately being sold to outsiders - nor was there a leg to stand on how it would benefit future generations...but he could accuse me of racism (or libel) and so disregard my facts.

Your comment was deleted because it was a rant with racist overtones. You are welcome to post your views but you need to tone down the vitriol.

Most comments here are rants- but I do take your point.  I went back to edit but time had expired. Thanks for your post

What do you consider a better investment vehicle in NZ then?

Warren Buffett's advice.  "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful"  

What do you invest in, what a good question.  Houses are overpriced?  How about Silver?  that's not overpriced, and it's used to make solar panels.  Or how about investing in a business! one which sells stuff that other people want to buy, even people from overseas.  Not only would that make you wealthy, but it would make New Zealand a wealthy country too.  
 
Hmm yeah but nah, screw that.  Overseas Interest rates are too low.  There are no barriers to capital flow, and my decisions are now governed by fear of asset price inflation.  I should just buy a ridiculously overpriced house and hope some foreigner will pay even more for it at some later stage.   Don't listen to me though, a scientist doesn't know anything about investment.

Do they have a a wreckingball or a least Stihl chainsaw in that toolbox ?
This credit fueled housing market will end in tears .

.