Early signs of macroprudential success in NZ

images

From Banking Day:

New Zealand’s banks have already begun clamping down hard on mortgages with high loan-to-valuation ratios, ahead of the expected introduction of a “speed limit” on their growth by the Reserve Bank of New Zealand.

RBNZ figures released this week show the value of mortgage approvals in the 13 weeks to July 12 was up just 3.2 per cent compared with the same period a year earlier. This is down sharply from the annualised growth seen in the 13 weeks before May 10 of 16.9 per cent.

“Banks have certainly toughened their decision making in recent weeks as they prepare for the Reserve Bank’s restrictions,” said Roost Mortgage Brokers’ spokeswoman Colleen Dennehy.

It’s worth thinking about, no? If macroprudential works, we could be deploying it ourselves, ramping LVR limits (or similar) while slashing interest rates  and watching the dollar fall like a stone. That would give us hope of bridging the mining investment cliff.

Instead we wait and cut rates paced with the disintegration of the economy, virtually ensuring that confidence erodes along with it and that there’ll be nothing rising in mining’s place.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. “If macroprudential works, we could be deploying it ourselves, ramping LVR limits (or similar) while slashing interest rates and watching the dollar fall like a stone.”

    We would also need to have properly enforced curbs on asset purchases (inc. residential real estate) by foreigners so the devaluation/lending limits don’t just end up advantaging foreign buyers over the locals.

    • That’s a very interesting question. It all depends what society we want for ourselves. You could have a higher LVR for foreign buyers. But in the end of the day do you want to stop the best and brightest people from around the world with plenty of cash moving here?

      • I was thinking mire about those foreigners that are unleveraged (and pay with cash that they bring in a briefcase) and thise that can borrow offshore very cheaply, unaffected by Australian LVR rules.

        In my mind there is a difference between “cashed-up” and “best and brightest”… But those who move here would not be foreigners, so should be welcome to buy all they want (with what’s left over after they paid their $5m for their PR, presumably).

      • Some are the best and brightest and others are just corrupt officials trying to smuggle their bribes out of China so they don’t lose them when it all falls apart.

      • do you want to stop the best and brightest people from around the world with plenty of cash moving here?

        Yes. I certainly do want them stopped. Their talent beats me to a job and their cash beats me to a house.

        If I was a landlord and business owner I might feel differently.

      • In Australia if a foreign buyer has permanent residency then they can get exactly the same loans that other Australian can obtain.

        If an expat Australian working overseas wants to buy then 90% is usually the max that they can borrow with some genuine hassles over loan servicing. Some banks are at 85%, but their request will receive some sympathy from lenders.

        If a non Australian without residency status and who is living overseas wants finance then the best that they can borrow is 80% and that comes with many difficulties on servicing based on foreign income converted to $AUD with buffers for forex risk, as well as problems with documentation of income written in a foreign language which must be translated using accredited interpreters. Unless they have plenty of cash it’s possible but not easy for foreigners to buy here if they need local finance. Some local banks won’t touch foreigners.

      • flyingfoxMEMBER

        The best and brightest also have the option of going elsewhere…as do Australian citizens who fall in that category.

    • Foreign buyers aren’t immunized against seeing what is likely to happens to property prices. If you saw the potential for no or declining asset price growth in, say, New Zealand would you buy now, or wait until prices had shown their hand? “… macroprudential…. while slashing interest rates and watching the dollar fall like a stone” – No arguments from me on that one! But don’t do them in isolation as we did, and then when the benefit of lower interest rates has worn off, trying to bring in Macro as a last resort. Look and learn, Australia!

      • I agree, in theory, but if you are dealing with people who are just stashing their (ill gotten?) wealth away from possible confiscation(or as a step towards migration), then if the AUD halves and AUS land prices halve, surely they just buy four times as many assets?

        Not to say that this is necessarily the predominant class of foreign buyers, but I’m sure they are out there.

        PS. easy money and vulture funds were (reportedly) able to generate a bounce in the much broader and deeper US housing market – they could wreak havock in a market as small as Australia.

    • I personally don’t want to see restrictions on foreign buyers, for the reasons above, but i also don’t agree with the policies that let people buy their visa via buying a business or property.

      • How do you stop foreign buyers, anyway? I could set up shop in Auckland or Sydney tomorrow, buy property at will as a resident, and then apportion the ultimate ownership and control over each property in a little book I keep in my desk to whoever ‘lends’ me the money.

      • If the broader land supply is constrained (which it is), then they are just competing with local bidders and not really increasing supply.

        But agree that local investors are the far bigger problem currently, in terms if crowding out (would-be-)owner occupiers. Perhaps what I’m trying to say is that with any rule changes we don’t want to have a situation where we have one group of speculators come in and crowd out another group, rather than curbing speculation generally and helping owner occupiers and the rest of the economy recover from excessive land prices.

      • Foreign buyers mostly buy new properties. They increase supply and lower prices.

        What a bizarre theory.

        Perhaps Thailand should relax its rules about foreign ownership of property and they too could get the benefits of lower prices for locals. Bizarre.

  2. I suppose the rate of FHB has then dropped to zero.not sure why anyone would want this rule here.
    Investors applause

    • FHBer, by definition, are the bottom rung on that mythical property ladder, Dam. Without them, on average no one above gets to climb any higher. There might be property sales between existing owners, as each seeks to rationalise or quit what they have, but overall….it’s all downhill for prices until such time as the FHBer can be brought back into play, at financially sensible prices for them. And ‘sense’ is what’s missing from any overstretched asset market.

      • even if you think the current market is a ponzy, FHB are not needed as the market is now mainly between investors (who need them as tenants) and overseas buyers.

        for what I understand, prices did skyrocket in NZ when a whole lot of FHB got the fear of missing out all at the same time.

      • Precisely! So now with the FHBers precluded, what happens? Those that wanted in, are in. Those that can’t get in, can’t. So now what? As I suggested above, once prices stop rising or look like falling, why would anyone, foreigner or local alike, buy until they see how this new initiative plays out? If it fails, and prices go up another 10%, that’s an opportunity cost loss. If it works and prices fall 10%, for many, that’s an actual collateral loss, and feeds into whatever they want to buy next. For some, many perhaps, that 10% fall wipes out their entire re-investment equity. Interesting times ahead, Dam….Don’t ya love leverage! 90% LVR – 10% rise, double your money. 10% fall, lose it all…….

      • Exactly, Peter! How do you help those Battlers that you mention buy a car? Make it cheaper for them to buy, not allow them to assume a disproportionate amount of debt; debt that will eat into whatever future income they may have. Only one thing makes assets cheaper, Peter – a lower price. Lower interest rates etc. don’t make the assets cheaper, they make the debt, a liability, cheaper.

    • Dam,

      Surely you are not suggesting that high LVR loans to FHB’s is a good thing?

      See: How to destroy an Economy 101

      • @Nunatak,

        it s certainly not a good thing but since FHB are the riskest loans and need high LVR the most, they are going to disappear totally, leaving investors with more reasonably prices property to buy (FHB are the ones who tend to push the price up beyond reasonable) and with now captive “client”(FHB renters who cannot buy anymore).

        good thing ?

        not sure

        it was to protect the banks from themselves not to control the property market.

      • The risk isn’t in the LVR it’s in the loan amount. Honestly it wouldn’t matter if the LVR was 200% as long as the dollar loan amount was low, and the borrowers are creditworthy. Banks constantly lend unsecured without any great difficulty, but they keep the loan amounts low.

        Of course in a market where prices are rising quickly the risk for new entrants does become much greater as prices rise, and then LVR’s start to matter from a banking industry strength perspective.
        High prices cause risk as new entrants (borrowers) become ever more exposed. If a market really is overheating then any macroprudential tools involving LVR’s to be effective need to cap loan sizes at LVR plateaus.

        IE perhaps 95% capped to a max of $350K
        90% capped to a max of $450K
        80% unlimited.
        etc, as applicable to the market conditions.

        That doesn’t prohibit battlers buying well priced homes but it does keep a lid on runaway prices.

      • It also puts a floor under prices as well, Peter. It’s another case of those with the least supporting those with the most…. …..

      • Did it drive up the price of cars Janet, or are they more affordable now than they were when the first model T rolled off the line?

      • “IE perhaps 95% capped to a max of $350K
        90% capped to a max of $450K
        80% unlimited.
        etc, as applicable to the market conditions.”

        Peter, your idea is not without merit, but you would need to shave 30%-50% off those dollar value caps. Allowing battlers with $17k in the bank to borrow $350k is an open invitation for the continuation of our speculation culture.

        It also means that everyone else has to similarly overpay for battler-level homes.

        I do prefer he speed limit approach, because if forced to ration credit, banks will allocate it to least risky people first and also exert pressure on borrowers to borrow less (so they’re not counted towards the high-LVR limit).

      • Exactly, Peter! How do you help those Battlers that you mention buy a car? Make it cheaper for them to buy, not allow them to assume a disproportionate amount of debt; debt that will eat into whatever future income they may have. Only one thing makes assets cheaper, Peter – a lower price. Lower interest rates etc. don’t make the assets cheaper, they make the debt, a liability, cheaper.

      • “IE perhaps 95% capped to a max of $350K
        90% capped to a max of $450K
        80% unlimited.
        etc, as applicable to the market conditions.”

        Not such a bad idea, but surely the income supporting the loan is also relevant? Particularly as higher income earners generally have more “disposable” income available to service loan repayments.

        I’d rather make a 200% LVR loan of $500,000 to someone earning $500,000/yr than a 100% LVR loan of $100,000 to someone earning $25,000/yr

      • Peachy although I have read a fair bit on the NZ market I don’t wish to be an armchair expert on their situation, so that was just by way of explanation. As I said “as applicable to local conditions”

        Janet – we have markets for wheat, rice, sugar, bread, chocolate, wine, beer, etc etc etc.
        They work just fine without access to credit driving prices beyond what we are prepared to pay, except when the supply/demand equation becomes unbalanced – then we see riots over the price of wheat and rice in Indonesian cities or towns in India.

        Fix the supply issue.

      • AB – high income earners should have savings for a deposit. Seriously someone on big bucks without a deposit is a financial delinquent, but I wouldn’t say that about a battler who has far less opportunity to accumulate savings.

        It’s damn hard on a minimum wage to pay rent and raise two or three children, and then try to save a large deposit on top of that. Hopefully there will be a few battlers reading this who will undersatnd.

        They might be able to scrape up 5% or even 10% but savings 20% is beyond battlers as a rule whilst they are still paying rent and putting food on the table.

  3. @Nunatak,

    it s certainly not a good thing but since FHB are the riskest loans and need high LVR the most, they are going to disappear totally, leaving investors with more reasonably prices property to buy (FHB are the ones who tend to push the price up beyond reasonable) and with now captive “client”(FHB renters who cannot buy anymore).

    good thing ?

    not sure

    it was to protect the banks from themselves not to control the property market.