Tensions are building between the New Zealand National Government and the Reserve Bank of New Zealand (RBNZ) over the RBNZ’s plan to implement limits on high loan-to-value ratio (LVR) lending in a bid to allow it greater flexibility to lower interest rates and take pressure off the overvalued kiwi dollar without re-igniting a housing bubble.
New Zealand’s Prime Minister, John Key, is reportedly pressuring the RBNZ to relax LVR limits on first home buyers (FHBs) for fear that higher deposit requirements would crimp their ability to enter the market. From Interest.co.nz:
Prime Minister John Key was adamant on Thursday that the Reserve Bank measures would not hit first home buyers too hard, while Reserve Bank Governor was equally adamant that first home buyers would have to be included within the speed limits to have the desired effect.
“I’ve discussed the matter at length with the Reserve Bank Governor, including last night, and I’m convinced we can navigate a way through which means that the banks have less loans which are more leveraged, but continue to make sure there’s opportunities for first home buyers to have higher degrees of leverage,” Key told reporters in Wellington…
The Governor stood firm in a news conference after the bank’s June quarter Monetary Policy Statement against suggestions first home buyers be ‘carved out’ or exempted from the limits, as they have been in other countries…
Key pointed to other countries that have carved out first home buyers and said he was talking with the Reserve Bank to ensure first home buyers still had opportunities to borrow with low deposits.
“I for one would not support a situation where first home buyers are completely locked out of the market,” Key said.
“The people we’re wanting to get into the market are first home buyers,” he said…
Earlier Wheeler said the bank had to include first home buyers in its planned speed limits because they made up about a third of high LVR lending, which itself made up a third of all new lending…
“Carving that out would be a big exemption in terms of mortgage pressures. We haven’t made up our mind at this point. We’re out consulting with banks. First home buyers are a very significant part of the market and the Auckland market is experiencing very rapid house price appreciation,” Wheeler said.
Ultimately, the issue of housing affordability in New Zealand is not about access to credit, but rather policies on both the demand and supply-side that have acted to force prices upwards, out of reach of FHBs.
Looking at the demand-side first, New Zealand has arguably the most favourable tax laws on property investment in the world, including: Australian-style negative gearing (permitting investors to deduct rental losses against wage/salary earnings), no capital gains taxes, no land taxes, and no stamp duties. It also allows foreign investors unrestricted access to the New Zealand housing market.
Such policies encourage excessive investor demand into the New Zealand housing market, which then competes against FHBs, forcing-up prices and worsening affordability.
The supply-side is also constipated via excessive restrictions on land supply and new development, in addition to an aversion by governments to invest in new infrastructure. Accordingly, excess demand manifests more in rising prices than increased construction.
In essence, New Zealand’s housing affordability problem is mostly a land affordability problem. As shown below, lot prices have surged over the past decade (particularly in Auckland, where planning restrictions are tightest), with land prices also making-up a bigger proportion of overall dwelling values.
If the Prime Minister was truly concerned about the welfare of New Zealand FHBs, he would seek to reduce speculative demand in the marketplace via a combinations of taxation reforms (e.g. abolishing negative gearing, implementing capital gains taxes on investment properties, implementing a broad-based land tax, and restricting foreign purchases), whilst also re-doubling efforts to reform New Zealand’s restrictive planning system, free-up land supply, and boost infrastructure spending.
High LVR borrowing is a symptom of the above policy failures, not the root cause of (or solution to) New Zealand’s housing woes.
