Property Institute spits the dummy over proposed new LVR restrictions

Property

Property Institute suggests political interference in the Reserve Bank's plans to introduce new LVR restrictions for property investors

19th Jul 16, 1:59pm by Greg Ninness

The organisation that represents property valuers has accused the Reserve Bank of caving in to pressure from the Prime Minister over its plans to introduce tougher loan to valuation ratio (LVRs) restrictions for residential property investors.

The Reserve Bank has said it is considering restricting lending to residential property investors to 60% of a property's value, a move which raised the ire of the Property Institute of NZ.

"This is essentially a U-turn," Property Institute chief executive Ashley Church said.

"Two weeks ago we were told that these measures would be introduced at the end of the year.

"Now they're suddenly sufficiently serious that they need to be introduced in six weeks' time,

"What's changed?

"Could it be that last week's serve from the Prime Minister has spurred the Reserve Bank into action?" he asked.

Church said even a whiff of political interference undermined the role of the Reserve Bank, which was to act as an independent referee for monetary policy.

"If the Reserve Bank can be politically influenced, it calls into question the entire basis of its existence and the terms of the Reserve Bank Act," he said.

"There was a time when the Reserve Bank could be trusted to to act above politics in the best interests of the nation.

"If that's no longer the case, perhaps the government should consider withdrawing some of the powers it has given the bank or even reviewing the Act."

Church also argues that if the Reserve Bank proceeds with introducing the new LVR restrictions, it will have little effect on rising house prices.

"Many investors will already have close to, or over 40% equity, and this will be little more than a slight speed bump," he said.

"One off, incremental and politically motivated announcements won't cut it.

"We have a runaway market and a generation of kids who can't afford to get into a home of their own.

"We need a comprehensive set of smart measures that send a clear signal to private developers and redirect investor activity in to the building of new houses and give our young people a fighting chance to buy their first home."

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54 Comments

by rjn1 | 19th Jul 16, 2:13pm 1468894398

Quick, steal his toys before he throws them again.

If this will be of such a negligible effect, why doth thou protest so much?

As a general participant in the banking system (i.e. a member of the NZ public), I welcome this from a financial stability standpoint. If it has the added bonus of shoring up the house of cards, all the better.

by J.C. | 19th Jul 16, 2:54pm 1468896871

Yes, your 2nd comment rings true. It's almost an indirect admission that the guy has no idea what the effects could be.

by notaneconomist | 20th Jul 16, 8:22am 1468959768

You say you are a general participant in the banking system.....so tell us all on who's efforts is a mortgage instrument created.....you know the click of a mouse which creates money out of thin air.......your bank and the RBNZ get to rort a percentage off of this money creation off the person who creates the instrument and pays the interest.......

by Zombie ponzi | 19th Jul 16, 2:20pm 1468894829

"If that's no longer the case, perhaps the government should consider withdrawing some of the powers it has given the bank or even reviewing the Act."

That's a really funny argument. If there has been political influence surely at least 50% of the criticism should go to the Government for meddling rather than suggesting RBNZ powers be revoked. Do we really want to be some banana republic where the Government controls monetary policy?

by head_down_bum_up | 19th Jul 16, 2:30pm 1468895402

I think they'll find the RB said that they would look to introduce changes BEFORE the end of the year, not AT the end of the year.

The RB is acting in the best interest of the nation, it's just that it is not in your interest.

And if he thinks these changes won't have an impact on investors, then why does he care anyway.

by keriwin | 19th Jul 16, 2:59pm 1468897165

Rubbish, they are not acting on behalf of the whole nation. This is a big city problem. This is a total disaster for us in Northland where it has not been viable to build houses since 2008 because the values were lower than the build costs. We were just starting to see a pick up but this will stop it in its tracks. Why not use postal codes to choose the areas that need restrictions.

by J.C. | 19th Jul 16, 3:16pm 1468898171

Good point. Could be devastating for Northland.

by head_down_bum_up | 19th Jul 16, 3:58pm 1468900690

If you're an investor.

by rastus1 | 19th Jul 16, 4:11pm 1468901484

...then lets lower build costs... meet the market like every other business must. Not just rely in ponzi money to keep it all bouncing along in fairyland.

by notaneconomist | 20th Jul 16, 8:43am 1468960980

Rastus you have no idea do you? Who do you think sets the market? it is you whinging socialists demanding Nanny State intervention at every corner that sets the market so if you think housing is a ponzi then take responsibility and stop running to Nanny.......Nanny makes the market do you hear me it is Nanny who makes the market.........if there is a ponzi then you will have to look at Nanny, Fairyland, Socialists maybe the mirror!!

by rastus1 | 20th Jul 16, 9:53am 1468965206

Yes nanny makes the market... and she needs outing She has turned the entire housing situation into an investors plaything, entirely geared towards money making for a view. The taxation, bank, council and commercial policy settings make this abundantly clear. Every other commodity is dropping in price...yet the propped up raging housing ponzi bull runs wlld.

Why should this be accepetable? It need not be.

So yes nanny does make the market, a socialist mother who only has eyes for a very few (and those few are at the top).

by notaneconomist | 20th Jul 16, 10:48am 1468968485

Well get rid of Nanny State then......otherwise you're just picking on a select group because you can.

by murray86 | 20th Jul 16, 9:36am 1468964193

That introduces a new issue to the debate - the cost of building houses. Building materials are already acknowledged as a rip off here, compliance costs, resource management costs, land costs. what else? and what can be done to change them?

by notaneconomist | 20th Jul 16, 10:52am 1468968766

Get rid of Nanny State and the price will change.

by sharetrader | 19th Jul 16, 5:27pm 1468906027

time to lower your costs, like many other businesses have had to do over the last five years to stay competitive

by Northland Hippy | 20th Jul 16, 5:45am 1468950326

Thats why a large % of us Northlanders build our houses without building permits. The really hardcase thing is that we don't have a leaky home crisis. Our economy doesn't support the cost of building to code and our wonderfull councils let us do our own thing.

by 1sthomebuyer | 20th Jul 16, 6:42am 1468953775

This won't apply to new builds though- only investors buying existing properties. Still take the point about build costs- they have got silly expensive for even basic maintenance

by rzd | 19th Jul 16, 2:45pm 1468896334

Awww, poor baby.

by muntijaqi | 19th Jul 16, 2:47pm 1468896441

something tells me that RBNZ has hit some painful spot.

by muntijaqi | 19th Jul 16, 2:52pm 1468896772

We need a comprehensive set of smart measures that send a clear signal to private developers and redirect investor activity in to the building of new houses and give our young people a fighting chance to buy their first home.

..and that measure that will help young people buy their first home is precisely deflating the bubble.
What better measure that instead requiring less deposit for a mortgage actually requiring less mortgage for the same deposit?

by reena | 19th Jul 16, 2:58pm 1468897123

Better than nothing but yes government has to act if serious in controlling housing crisis.

Right time for national government to announce restriction on non resident buy as that will go a long way along with LVR and loan to income measures that are being introduced by RBNZ.

WILL THE NATIONAL PARTY GOVERNMENT ACT NOW AS ENTIRE NATION IS WATCHING THEM

by nzakl | 19th Jul 16, 4:11pm 1468901481

"To seek truth requires one to ask the right questions. Those void of truth never ask about anything because their ego and arrogance prevent them from doing so"

Right Question : Besides supply is the Foreign Buyer (non Resident Buyers) adding to the Housing Crisis ?

People feel yes and government feel no, so another

Right Question : Why Does not the government declare the correct Overseas buyer data to the people of NZ ?

That give rise to another

Right Question : If the overseas buyer data declared without manipulation of word and if it is (which it will be) much more than 4% , will the government whose entire policy of non action against foreign buyer is based on this faulty data, apologies to the people of the country and introduced measures without further delaying ?

National party can ignore the questions but for how long as now it will be hard for them to hide as media has really woken up and have started to ask hard uncomfortable question, which people want answer of.

by johnkerikeri | 19th Jul 16, 9:23pm 1468920216

Personally I'll be surprised in the National government does anything more now than they have done for years. I think they are absolutely flabbergasted by the housing crisis (what housing crisis they ask...) and have no idea at all about how to sort things..

They seem to reckon that they are right to govern as little as possible and wait sol in the fullness of time the problem (whatever it is) will wither away and fall unnoticed to the ground.

Boy the day of reckoning is coming for that behavior.

by printer8 | 19th Jul 16, 3:00pm 1468897256

I can only hope that Ashley Church's comments have been poorly reported.
I would have thought that the Valuers' Institute would have been a responsible organisation and concerned about the risks and consequences associated with an overheated speculative bubble.
Rather than welcoming the news as both prudent and proper, he has focussed on being critical of the RBNZ assuming that they are naïve enough to simply just follow the directions of the Prime Minister.
This isn't simply a case of "Yes, Minister"!

by sharetrader | 19th Jul 16, 5:29pm 1468906162

my last valuation had the risks listed and LVR"s were among them along with world events

by Northland Hippy | 20th Jul 16, 5:53am 1468950837

I agree with Church, raising LVR is dumb as it penalizes NZers when the real problem is 160,000 immigrants in 3 years and foreign investors.

by Too clever by half | 19th Jul 16, 3:17pm 1468898223

National will act as the election is looming National are not stupid,many things are discussed over a cuppa tea.

by mikeeagle | 19th Jul 16, 3:44pm 1468899896

Imagine if the RBNZ doubled the OCR overnight. There is nothing wrong with graduated changes. Now they have doubled the LVRs for investors. If house prices fall it will reduce wealth and that will flow through to consumption. I am gobsmacked over the RBNZ move. This move is likely to cause a reduction in prices the RBNZ wants to avoid and cause the housing market to crash. It has huge potential to damage to the economy.

This kind of tampering and tinkering makes it difficult for people to do business as the rules keep changing. Treat the LVR the same way you treat other macro tools. Do it incrementally, do it regularly, not one off.

by Penguin | 19th Jul 16, 3:55pm 1468900535

To be honest new LTV's have been mentioned for many months. LTV's have replaced interest rates as the mechanism to controlling the property markets. The negative is that it doesn't help FHB's and the positive is that it reduces risk within the property market,in particular negative equity and potential bankruptcies.
The Propeŕty Institutes comments are stupid.

by Plutocracy | 19th Jul 16, 3:59pm 1468900747

If house prices fall it will reduce wealth and that will flow through to consumption.

Could you explain this theory of yours in more detail please? (my BS meter is sounding). You do realize that first home buyers and renters also 'consume' right?!

by Sluggy | 20th Jul 16, 7:33am 1468956780

What mikeeagle meant was :

If house prices fall it will reduce home owners equity and that will not allow them to borrow more which will flow through to consumption. In effect forcing people to live within their means and returning the booming consumer sector to some form of normality.

by mikeeagle | 20th Jul 16, 9:40am 1468964415

In detail explanation for plutocracy

The theory part is pretty simple. Aggregate Demand is a function of consumer spending, investment spending, government spending and net exports ( AD = C + I + G + ( X - M) )

Hit wealth and you hit consumer spending as consumer spending is a function of interest rates, expectations, consumer confidence, incomes and wealth. Hit consumer spending and AD falls. If house prices fall wealth falls and consumer spending falls. Yes it is a function of interest rates as well so this may counter it but there are risks to the Economy from this policy.

The RBNZ is worried about a property crash and its implications for the "financial stability". They have been concerned about this for some time along with debt of farmers. However, this reaction seems knee jerk and politically motivated. Doubling the LVR has big implications for the market and property investors who are a legitimate part of the market. It would not be the first time in history that a knee jerk policy reaction causes the very thing it is designed to stop. The RBNZ is normally calm and collected. So increasing LVRs is fine. But why 20% in one go. The OCR goes up or down in small increments. The RBNZ should be fine tuning its policy e.g. 25% now, 30% in six months. That is fair and allows investors to adjust.

If property investors suddenly ( and a 20% increase in the LVR will make it sudden ) pull from the market ( the buying part ) which is highly likely this could cause prices to fall. So the emphasis here is sudden. Last week I could buy a property and now I can't. I wasn't planning to but if I was I am suddenly out of the market. So given a big exit of investors from the market and this causes prices to start falling even first home buyers wont purchase and banks won't want to lend to them. Who would lend on a property where the security will be falling in value.

If you think a booming property market is bad, wait to you see one that starts to fall.

As for the impact of increasing LVRs on credit multipliers, well that is another story.

by Brendon | 20th Jul 16, 10:00am 1468965619

BS economics -if the value of existing houses falls -one group becomes less wealthy while another group -those who can buy a basic necessity (shelter) for less, gains.

Another way of looking at the dubiousness of this 'wealth effect' is if a country restricted trade in food -this would raise the price for food -another necessity and raise the price of food producing land. If 'free trade' was instituted, food prices would fall and food producing land prices would then also fall. In this scenario what is most important -cheaper food benefiting consumers or preserving the 'wealth effect' of land owners?

by Roelof | 20th Jul 16, 10:04am 1468965898

Aggregate demand is a function of spending...AND.... that spending is a function of money + credit..

If you look back over history ...it is the credit cycle that drives the business cycle and the Boom/Bust nature of Markets.... ( The western world is at the end of a long term debt cycle where it needs to deleverage )

The wealth effect of Markets that are driven by credit growth.... is the same illusion as a family who lives the "high life" and buys Cars, boats, houses and holidays with Debt.... At some point they have to start paying debt back.... and their.." consumer spending " needs to decline.

Mike Eagle.... are you infering that this family, reducing "consumer spending", is a bad thing....and that somehow they can avoid it ??

There is no escaping the unintended outcomes of excessive credit growth..... in my experience..

the RBNZ is simply being prudent ...in my view... They see the dangers too financial stability..... Wheather they are doing the right thing... i'm not so sure... but they are trying to mitigate a credit induced Bust in Real Estate.... ( that can't be a bad thing..?? )

by mikeeagle | 20th Jul 16, 10:12am 1468966367

I agree money is a fiction but it is a very powerful fiction. No the RBNZ are not being prudent. Prudent is small increments. If they were being prudent they would have started increasing the LVR in the regions six months ago. Paul Keating caused a recession in Australia because he got the timing wrong. I lost my job in that recession. The timing of this is possibly wrong and the size of the change is probably wrong . Better late than never isn't good for the Economy.

by Roelof | 20th Jul 16, 10:27am 1468967227

I agree with you there...the suddenness and size of it.
Plenty of forewarning is part of prudence... also having some foresight..
Central Banks never get timing right..

Better late than never might not be good for the economy... ( if you think never ending growth in consumer spending is the endall) ..... BUT doing nothing probably leads to a worse outcome ...further down the road...
Don't you think..???

(I dont think money is a fiction.... just the wealth effect of too much credit growth..)

by MisterB | 19th Jul 16, 9:55pm 1468922137

Er, it's not double. Was 30%, now 40%. That's pretty graduated.

by mikeeagle | 20th Jul 16, 9:52am 1468965156

Mister B

Correct for Auckland but more people live outside of Auckland. The impact will be huge in the regions where it has gone from 20% to 40% in one go. And 10% is a big jump especially if you take into account the multiplier effect but that is another story.

by mikeeagle | 20th Jul 16, 10:13am 1468966403

by Tom Joad | 19th Jul 16, 4:33pm 1468902828

"Two weeks ago we were told that these measures would be introduced at the end of the year.

"Now they're suddenly sufficiently serious that they need to be introduced in six weeks' time,

"What's changed?

Nothing's changed Ashley.

This "do nothing" government has continued to errh... "do nothing". That's in spite of the RBNZ's repeated warnings about financial stability. That's why they have had to act promptly in order to take some air out of this dangerous bubble.

Agreed.

Now could you re-direct those comments to the government, who are the only body that can legislate these measures, and get off the back of the RBNZ.

by quality guy | 19th Jul 16, 4:29pm 1468902559

Nats wont act because that will force house prices down. Rbnz its about time you did this but i think it should be higher, say 50%. As for property institute, oh what a shame your greedy members dont have until the end of the year to make this crisis even worse. Wot greedy pricks. As for Northland, what a silly comment. The best chance for Northland is if prices fall, the local may actually afford them then. But overall rbnz action is too little too late

by Northland Hippy | 20th Jul 16, 5:59am 1468951141

You can still buy houses in Whangarei for under $200,000.

by sharetrader | 20th Jul 16, 8:11am 1468959115

yes but what about jobs, for too long government after government has neglected growing provincial NZ in favour of the cities because that are where the votes are

by Roy1 | 19th Jul 16, 5:09pm 1468904954

First Home Buyer too should have an association or representation so if any news that is not what membet wantd can cone out and criticize, defend and lobby.

Actually Wellfare of FHB should be represented by government BUT...........National Government.........Rich.......Overseas buyer..........and who cares about common people.........who are to be used and abused

by Joe Public | 19th Jul 16, 5:34pm 1468906473

If no impact why is the guy upset. I say hit them again with loan to income restrictions.

Nzaki/reena the foreign buyers numbers were correct just the headlines were missleading.

Foreign buyers = non residents + temp visa workers + foreign students

Non residents = 4%
Temp visa workers + foreign students = 35%
Foreign buyers = 39%

Read the article again posted by interest when LINZ provided the data and you will notice the following :

"Technically, the combination of the 3% declared foreign tax residents, 35% who said they were students or on temporary visas,"

http://www.interest.co.nz/property/81501/linz-says-3-home-farm-and-busi…

The headlines didnt explain the full story hence why so many people are confused. In australia foreign person are any non permanent residents. So include temp visa workers, foreign students and non residents.

The headline only mentioned the non resident component. Why is this so ?

One for the editor i guess.

by Joe Public | 19th Jul 16, 7:39pm 1468913946

This is great news for fhb

Anything that reduces investor demand has to be a good thing for fhb. Irrational to say otherwise.

by xelnaga | 20th Jul 16, 7:26am 1468956403

http://tinyurl.com/jd525gn

Sums it up.

by PocketAces | 19th Jul 16, 8:25pm 1468916749

If property investors are squealing like stuck pigs then I reckon someone must be doing something right, too bad it's not elected representatives of the country.

by Yvil | 20th Jul 16, 2:59am 1468940381

I'm a property investor and I say "well done", finally a meaningful measure rather than always pussy footing around.

by quality guy | 20th Jul 16, 6:20am 1468952425

Next prudent thing to do would be for rbnz to buy govt bonds equivalent to the value of nz govts overseas debts. Or even let the average kiwi buy some bonds. The point here is majority of govt debt is in us dollars. So when the nz dollar does fall, we will face a significant rise in govt debt. If govt had borrowed on the local market in the first place it would have helped to keep the property bubble in check through higher interest rates. This is far from the money printing of the fed. It simply swaps debt ownership and reduces future debt to gdp risks. The surplus can pay down the debt.

by David Chaston | 20th Jul 16, 7:21am 1468956098

That is factually wrong. You just made that up. Almost all NZ Governmnet debt is denominated in NZD. As such it has zero exchange rate risk. There are 11 nominal bonds on issue worth $72 bln, plus another three inflation adjusted bond issues worth about $13.6 bln. The oldest bond issue oustanding dates from April 2005.

(See link to "on issue" on this page.)

by ngakonui gold | 20th Jul 16, 8:03am 1468958632

The Waikato Times quotes Mr Church as saying that the announcement"""is directionless and smacks of political expediency''''''
No Mr Church it's not directionless it's actually heading in the right direction.
As far as political expediency,you could say that they used the same expediency that you guys do when you put up rents.

by Steve_80 | 20th Jul 16, 8:45am 1468961111

Have I missed something? The higher deposit requirements surely will result in banks requiring a larger volume of updated valuations of existing property, which will give his members more business.
These LVR restrictions are good business for valuers.

by johnsy | 20th Jul 16, 1:00pm 1468976436

Aren't we all missing a point here? The RBNZ is the guardian of the monetary policy. Whatever measures have been announced here are towards making it easier to control the monetary policy and target the inflation standard. It is not their duty to control house prices --they are there only to avoid the financial instability that could be caused by a house crash. So the measures are good in way that they will indirectly slow down the rate of increase in the house prices but not bring them down.
The national party , RBNZ and the council should stop passing the buck and encourage the Nats to target the macroeconomics to increase the supply of houses to meet the evergrowing demand.