RBNZ cries wolf on mortgage lending

By Leith van Onselen

The Reserve Bank of New Zealand (RBNZ) today released its quarterly Statement on Monetary Policy (SoMP), where it kept the official cash rate unchanged at 2.5% and signalled that it would remain on hold until 2014 due, in part, to the ongoing drought, which is expected to lop up to 1% from New Zealand’s GDP.

The RBNZ’s comments on the housing market were particularly interesting. The RBNZ noted that there had been a notable pick-up in house price inflation, which is “estimated to have increased in real terms at an annual rate of 6 percent over 2012 and are forecast to increase by 6.2 percent and 3.6 percent in 2013 and 2014 respectively before levelling off” (see below chart).

Housing turnover continues to gather momentum and house prices are now around 7 percent higher than a year ago. While the pick-up to date has been most pronounced in Auckland, strength in the housing market is becoming more widespread with house price inflation increasing throughout New Zealand [see next chart].

The RBNZ also noted that credit growth is now exceeding deposit growth, requiring the banks to borrow offshore, and that there has been a marked pick-up in high loan-to-value ratio (LVR) mortgage lending, with around 20% of all lending growth now in the 80-90% LVR bracket, while a further 10% was in the 90% plus bracket:

…loans and advances’ growth surpassed deposit growth in December on an annual basis [see below chart]. There is some indicative evidence that higher loan-to-value ratio lending has made up a greater proportion of new lending. If credit growth continues to pick up, banks may issue into offshore markets with greater frequency. While this would increase banks’ reliance on global funding markets, finding costs are the lowest they have been since early 2011.

…mortgage rates, which have been low for the past few years, have fallen further in recent months reflecting a decline in bank funding costs. In addition, it appears that loans with a high loan-to-value ratio have been increasing as a share of total new lending. Moreover, household caution towards debt may be waning, with housing credit growth picking-up [see next chart].

While housing demand is increasing, supply remains tight. The number of new listings is growing only slowly and the supply of new houses is limited given low levels of residential investment in recent years. As a result, total inventory on the market is low and the ratio of listings-to-house-sales – a measure of tightness in the housing market – is at levels last seen in 2007.

…recent momentum in the housing market is assumed to build further. Annual house price inflation is forecast to peak at 8.5 percent in 2014. From there, an increase in the housing stock and elevated household debt levels is assumed to restrain house price inflation.

The lowering of bank funding costs has also seen an increase in fixed-rate mortgages, whose interest rates have fallen to their lowest level in around 40 years:

A number of banks dropped their fixed mortgage rates during the first two months of the year, with the 6-month rate dropping to as low as 4.79 percent, the lowest market mortgage rate New Zealand has seen for at least 40 years. Borrowers continue to migrate to fixed rate mortgages. As is typically the case, borrowers are shifting into the cheapest part of the curve, which is currently six-month to two-year fixed mortgage rates.

The proportion of borrowers on fixed terms greater than two years is just 5.5 percent, compared to a peak of 33 percent in 2007. The average time until mortgage rates are re-priced has increased from 4.7 months (at its low in February 2012) to 6.7 months as at the end of January.

Despite the growing housing risks, the RBNZ seems highly complacent. Nowhere in its SoMP does the RBNZ mention the development and use of macro-prudential tools, including limits to high LVR lending, in order to temper mortgage and house price growth.

While the RBNZ has promised to deliver a framework for macro-prudential tools later this year, it has a long and checkered history of using “open mouth operations” to warn about housing risks, but failing to take any decisive action. With a new governor at the helm, I had hoped that the RBNZ might finally be getting its act together. But after reading the SoMP, it seems that the RBNZ is as complacent as ever and that there is unlikely to be any meaningful reforms to mortgage lending.

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Unconventional Economist
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  1. No on was more encouraged by Graeme Wheeler’s initial comments on up-taking his new role, but, My God! What a disappointing he has proven to be. Your final paragraph, Leith, sums the situation up to a tee.

  2. Graeme Wheeler’s RBNZ projections and policy:

    “We project the economy to grow at an annual rate of between 2 and 3 percent over the forecast period”

    “The Reserve Bank estimates house prices increased in real terms at an annual pace of 6 percent last year, and will rise 6.2 percent and 3.6 percent this year and the next.”

    Who’d want to create a business and employ workers for 2-3% when buying property will get you 6% ! The man’s a fool.

  3. Would be preferable if the OZ RBA only adjusted rates quarterly…. Would kill all the monthly noise betting which way rates will go….

  4. It is worse than that Janet because the 6% is tax free-so only complete fools operate a business-esp one exposed to FX risk which is anything of size and consequence.
    The problem is how does this madness end?. If the banks are prepared to continue borrowing offshore(tick) and if nominal wage growth is around 5%(tick) then the game of more debt/higher prices can go on and on as long as rates stay low(tick for the next 12 months at least).
    You will say use macro tools-and we will know more about that shortly. But if I were Wheeler I would say-look-this is a political issue(cap gains tax esp). Don’t expect me to take risks with tools that may have uncertain consequences to patch over your inadequacies.
    I see Bill Moss saying in the AFR this morning that he sees the game going on for another 5 years or so in Australia presumably because that’s when he sees rates going up.Hard to disagree.But when it does eventually hit the fan it is going to be very messy.

    • Of course I’d say use MacroTools – and I have been! – but that’s not going to happen! We’re in too deep.
      I just returned from lunch, and my dining partner is off to Auckland this weekend to buy a new car. Today’s announcement, apparently, has given him the go-ahead to get the thing done, with only one justification. His property portfolio has just given him the Green Light to borrow another tranche against it. That’s where our astute RBNZ Governors business assistance is going….Germany!

  5. Wow, I thought Oz had a problem but the Kiwis make Oz property speculators look fiscally responsible!

    It’s like the Kiwis looked at the menu for property market failure and said “we’ll have the Spanish style thanks”.

    This isn’t going to end well for Australian banks with significant exposures to New Zealand.

    • NZ is way worse than Australia. It has even tighter supply, negative gearing, zero CGT on investment properties, no stamp duties (albeit a good thing when it comes to owner-occupied housing), and no land taxes.

      • …and we get to keep low interest rates… guaranteed…until 2014. Graeme Wheeler is having delusions of Bernanke grandeur….How on earth can a small, (wide!)open economy give guarantees on the setting by its Central Bank? Where is the autonomy? Where is the responsibility to its people? Oh, of course…. they’re all property owners with everything to lose.. except those that aren’t, many who are going to be ground into the dust by the blind ideology of an ex-World Banking man.

  6. The Saints give me strength!
    “The Reserve Bank’s prospective new toolkit to iron out asset bubbles won’t be able to stop a rampant Auckland housing market….”Deputy Governor Grant Spencer told Parliament….Graeme Wheeler told politicians the last thing the country needs is a property bubble that gets out of control, and that’s why he has moved quickly with the new tool-set….”
    Moved quickly! A dead tuatara moves quicker…