RBNZ implements macroprudential mortgage limits

ScreenHunter_01 Jan. 29 08.11

By Leith van Onselen

It has been well documented on this site that the New Zealand housing market is, once again, facing bubble-like conditions, with prices in its two major markets – Auckland and Christchurch – rising strongly on the back of low interest rates, increasing credit availability, and tightened supply (see next chart).

ScreenHunter_03 May. 08 09.03

A housing confidence survey for the three month to April, released today by ASB Bank, showed a record 63% of survey respondents expect house prices to rise over the next year – higher than at any time during the 2000s housing boom (see next chart), with expectations of price growth broadening beyond Auckland and Christchurch.

ScreenHunter_04 May. 08 09.05

The Reserve Bank of New Zealand (RBNZ) has grown increasingly uneasy about the growing imbalances, which include not just rising housing prices but also New Zealand’s “significantly overvalued” currency, which is placing extreme pressure on its tradeable goods sector.

Accordingly, the RBNZ has today moved to arrest the situation by implementing so-called macro-prudential controls on high risk mortgage lending. Under the measures, the RBNZ will initially increase the capital that must be held against high loan-to-value ratio (LVR) mortgages issued by the Big Four banks (owned by Australia’s Big Four), which have to date used their own opaque internal models to calculate (and reduce) their Basel capital adequacy requirment.

The changes, which will come into effect from end-September, are expected to increase the capital held against mortgage lending by an average of 12%, and are aimed at tempering the credit/house price cycle and improving financial stability. The rationale behind the changes are explained in the below RBNZ media release (my emphasis):

While the financial system remains sound, developments in private sector credit and the housing market point to increasing risks to financial stability in New Zealand, Reserve Bank Governor Graeme Wheeler said today, when releasing the Bank’s May 2013 Financial Stability Report.

“Housing pressures are increasing risk in the financial system,” Mr Wheeler said. “House prices relative to disposable incomes are already high by international standards. Further price escalation will worsen the potential damage that could result from a housing downturn following an economic or financial shock.

“Our concerns are shared by the OECD and by the IMF in its recent review of the New Zealand economy. Housing risks have also been noted recently by all three of the major international credit rating agencies.

“Housing pressures, arising from pent-up demand, limited supply and the lowest interest rates in 50 years are being felt particularly in Auckland and Christchurch, where supply constraints are greatest. Demand is being underpinned by easier credit conditions, both in terms of lower mortgage rates and an increased willingness by banks to lend at high loan-to-value ratios (LVRs).”

Mr Wheeler said a strengthening of global financial market sentiment in recent months is contributing to the easier conditions by reducing bank funding costs and making offshore funding more readily available. “Global sentiment is also contributing to New Zealand’s overvalued exchange rate, which is continuing to hinder a rebalancing of activity towards the tradables sector that would assist in reducing external vulnerabilities.”

With the credit cycle now turning upwards, there are signs that the post-GFC recovery in household savings may be stalling. Household debt is rising from a level that is already high relative to incomes…

“Reflecting our concerns around housing sector developments, the Reserve Bank has been developing a macro-prudential policy framework. We have recently consulted on this framework and will soon be signing a memorandum of understanding with the Minister of Finance to confirm the key elements of the policy, including governance arrangements,” Mr Wheeler said…

“Looking forward, we want to ensure that bank capital requirements adequately reflect the risks around housing lending and accordingly we are undertaking a housing capital review. In the first stage of this review the Bank is increasing the risk weights applying to high LVR housing loans for the four major banks that use their own models as a basis for calculating minimum capital requirements.

“The increase in the risk weights, applying to all current and new high LVR loans for the major banks, will result in an average increase in capital held for housing of around 12 percent and will take effect from 30 September 2013.

Obviously, we believe the implementation of macro-prudential controls by the RBNZ is a great move. In principle, it should provide the RBNZ with greater scope to lower interest rates and place downward pressure on the currency, without risking further significant house price appreciation.

Hopefully, the move by the RBNZ will also put pressure on the RBA and APRA to consider similar macro-prudential measures.

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Comments

  1. Hat’s off RBNZ. Just like the same sex marriage issue, I fear Australia is well behind the Kiwis on this one for a while yet.

  2. HOORAY – some sense at last, we need more of this. How about a big reduction in immigration and foreign investment in housing.

  3. I would love to hear the RBA/APRA view on this undertaking by the NZ Government. Surely this is one for you Leith or David to directly discuss this with them. One would have thought you would have better sway.

    This would be a good article for SMH to publish from MB. Not sure what their criteria is but this is something that should be mainstream thinking in order to establish a more balanced market with lower risks.

  4. A good start.
    Even better would be to limit current lending on a house to a percentage of its previous value – eg the price 10 years ago. That would make the lending especially safe.

  5. Great.. Both RBNZ and Ross Garnaut throw their weight behind macroprudential .. RBA’s Luci will be under pressure now.

      • The Patrician

        If that is accurate it is the most stupid combination of housing and immigration policy ever.

      • And people scratch their heads and wonder why racism is on the rise!
        .
        The stupidity of not only our government but people who support this ridiculous cash for residency / selling to foreigners policy astounds me!!! The locals are all tapped out, lets open up to anyone overseas who want to buy here – criminal!
        .
        Expect to see more race related attacks if as expected unemployment continues to rise!
        .
        As a disclaimer I should add that I have a very secure job that pays well and if anything I stand to profit more by them letting more foreigners in…. The difference between me and those treasonous scum is that I care about what happens to this country.

      • drsmithyMEMBER

        Lots, $1m on an existing house in NZ buys you residency.
        And how many Chinese do you think there are with easy access to a million dollars ?

      • And how many Chinese do you think there are with easy access to a million dollars ?

        Probably more than there are vacant houses for sale in Auckland.

      • drsmithyMEMBER

        Probably more than there are vacant houses for sale in Auckland.
        Do you have reason to believe they all want a house in Auckland ?

  6. The swiss did not control their exchange rate by controlling their interest rate. They did it by direct market intervention and theirs is an economy relatively smaller than Australia.

    • Alex Heyworth

      IIRC it was more a case of they tried to control their exchange rate by direct intervention, but failed.

    • How about “Never”? Is that too soon for you?

      None of the current knobs in charge have the drive and the interest of actually doing that! Can you imagine the howling and the baying for blood from HIA & Co. ?