By Gareth Vaughan
Reserve Bank of New Zealand deputy governor and head of financial stability Grant Spencer will give a speech today on housing amid growing expectations the RBNZ will introduce further lending restrictions to address financial stability concerns stemming from the buoyant Auckland housing market.
Spencer will make a speech about housing at the Rotorua Chamber of Commerce at 12.30pm today.
"Given the topic and Spencer’s role, it is possible that a further announcement on financial stability is made in the speech," ASB senior economist Chris Tennent-Brown says.
On March 5 the RBNZ issued a consultation paper on three options to carve out loans to residential property investors as a new asset class for banks. The potential is that the RBNZ move could make loans more expensive for property investors, and potentially harder for them to obtain, given banks may have to hold more capital against such lending than they currently do.
The new treatment of lending to property investors is partly to facilitate the introduction of a macro-prudential property investor policy should that become necessary, the Reserve Bank said. RBNZ governor Graeme Wheeler last month said bank lending to investors was running at about 35% of residential mortgage lending nationwide, and about 40% in Auckland.
The three possible alternatives the RBNZ said were under consideration were:
· if the mortgaged property is not owner-occupied; or
· if servicing of the mortgage loan is primarily reliant on rental income (with the threshold likely to be 50%); or
· if servicing of the mortgage loan is at all reliant on rental income.
Consultation with banks over the proposals closed on April 7.
The RBNZ's next bi-annual Financial Stability Report is due out on May 13, which is another opportunity for the prudential regulator to spell out any plans to tackle the overheating Auckland housing market.
Back to the toolbox?
As long ago as February Finance Minister Bill English hinted the RBNZ may look to introduce another so-called macro-prudential tool to try and rein in the hot Auckland housing market. (The residential property loan move isn't considered a macro-prudential tool). English, alongside Treasury, must be kept in the loop on any such Reserve Bank plans.
Any new macro-prudential tool would come on top of the October 2013 introduction of "speed limits" on banks' high loan-to-value ratio (LVRs) residential mortgages. This means banks must restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the dollar value of their new housing lending flows.
The new tool economists seem to think the RBNZ is most likely to introduce is a debt-to-income restriction, perhaps along the lines of the one introduced by the Bank of England last year. In the UK no more than 15% of any lender's total number of new residential mortgages can be greater than 4.5 times the borrower's income.
Auckland Stratified Index up 20%
Spencer's speech comes a day after the latest Real Estate Institute of New Zealand monthly sales figures - for March - show fresh national and Auckland median price records, and the strongest sales volumes in any month since May 2007.
In the red hot Auckland market the March median sales price of $720,000 smashed the previous record high by $42,000, or 6.2%. The Auckland median price rose 13% in the year to March, and 11% in the three months to March. And the REINZ Stratified Housing Price Index, which adjusts for some of the variations in the mix that can affect the median price, shows a 20% annual rise in its Auckland Index.
Although the national median price was up $35,000, or 8%, to $475,000 in the March year, when the Auckland effect is stripped out the national median was up just 1.4% year-on-year.
The national Stratified Index, meanwhile, was up 9.5% year-on-year to a record high, and March's 8,803 sales is the highest monthly sales in a March since 2007, and the highest since 9,285 in May 2007. There were 10,989 sales in March 2007.
At $8.8 billion, the value of residential properties sold in March was a new record, smashing the previous high by $590 million, REINZ said.
'Early sign of broadening beyond Auckland'
"March is typically the strongest month of year for housing activity, but even taking this seasonality into account, the pickup in activity over the month was stellar," Tennent-Brown says.
"March housing data confirmed that the strength in the housing market is showing no signs of waning. If anything, the pressure in the housing market is lifting, and within the latest data showing an early sign of broadening beyond the Auckland-cantered theme of the past year."
"Saying that, the Auckland housing market is by far the most stretched region from an affordability perspective. We expect price appreciation in Auckland will continue this year, as strong population growth, low mortgage rates, and tight supply all play their part in this market, which represents around 39% of nationwide sales," says Tennent-Brown.
"The RBNZ has cited concerns around the lift in Auckland house price inflation, largely from a financial stability point of view, with potential for inflation spill over a secondary, but still important, concern."
"We expect the RBNZ will implement further lending restrictions to help manage the potential financial stability issues associated with the buoyant housing market. We (also) expect the RBNZ will leave the high-LVR lending restrictions in place until at least late 2015," says Tennent-Brown.
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