Debate rages over RBNZ’s LVR cap

ScreenHunter_08 Jul. 01 09.14

By Leith van Onselen

Debate over the likely impact and merits of the Reserve Bank of New Zealand’s (RBNZ) speed limits on high loan-to-value (LVR) mortgage lending continues, with Fitch Ratings Agency arguing that the reforms will have limited impact on overall mortgage demand and house prices, but should help improve financial stability by lessening the risks of borrowers falling into negative equity in the event that house prices fell. From Interest.co.nz:

Fitch director of financial institutions/international public finance Andrea Jaehne said the move would “buy time” for the stability of the NZ banking system.

“However, the impact is likely to be limited in scope and duration, as monetary policy settings remain accommodative.”

Jaehne said while the policy might lead to some reduction on house price pressures,  the tightening of lending conditions implied potentially greater competition for lower-LVR mortgages, “mitigating the overall impact”.

“This could pressure the net interest margins and operating profit of several banks. Lenders will be able to widen margins on some higher-LVR loans, although these mortgages will also require more capital from September”…

“Loose monetary policy could see credit eventually find its way into the system through other channels, lessening the impact of the LVR limits over time.”

Jaehne said since almost a third of the new lending in recent months has been in mortgages with high LVRs, the forthcoming macro-prudential measures should limit the negative impact of any house price volatility on banks’ asset quality and capital.

The New Zealand Herald seems more positive about the LVR restrictions, publishing an editorial lauding the new RBNZ governor for taking concrete action over jawboning and acting to butress the New Zealand financial system against shocks:

…for the first time, a governor has gone beyond a mere warning. Graeme Wheeler has invoked his power to regulate the mortgage lending banks may do on very low deposits…

His statutory job is to maintain the stability of the financial system, and he says the rate at which house prices are rising poses a potential risk to the system and the broader economy.

“Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future,” he says.

If that were to happen, of course, the borrowers on low deposit would be the first to lose their equity and they could owe the banks more than their house was now worth. If they stopped making mortgage payments, the bank could be left with a house of too little value to cover its outstanding loan. So the loan-to-value restriction is in the best interests of both borrowers and lenders if there is a risk that house prices will fall…

Contrary to the warnings of economists, it is common to hear investors say property has never let them down. The economists’ warnings, though, have an ulterior purpose. They believe that while property might be good for the personal investor, it is not so good for the economy. It is attracting capital that might otherwise be invested on more productive ventures and it is keeping the dollar’s exchange rate at levels that lower export earnings.

These, too, are not the Reserve Bank’s statutory concerns. But they are reasons to applaud any measures that might take some of the steam out of the housing market. Loan-to-value restrictions might shut out the poorest home-seekers but they will also limit the number of second homes that can be bought with less than a 20 per cent deposit…

Housing will be less attractive to investors than to genuine home-seekers with adequate savings, as it should be.

My views are similar to the New Zealand Herald’s. But while I view LVR caps and more responsible lending as good policy generally, improving financial stability and placing some downward pressure on house prices, it is no substitute for addressing the structural barriers precluding affordable homes from being supplied, including artificial restrictions on land supply (such as urban growth boundaries and restrictive planning practices), as well as inadequate financing and provision of infrastructure. Changes to New Zealand’s tax system to limit negative gearing and implementing a capital gains tax on second homes would also likely be more effective in moderating credit/housing demand without adversely impacting first home buyers.

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Leith van Onselen

Comments

  1. Keen’s revised his debt stats and Australia’s ‘different’ thesis. Australians are debt junkies par excellence.

    “It’s also obvious that credit growth turned negative in both the USA and Japan after their crises – but not in Australia. Credit growth slumped from plus 25 per cent of GDP in Japan at the height of its bubble to minus 15 per cent a decade later, and it spent a full decade in negative territory. America plunged from plus 15 per cent in 2008 to minus 5 per cent in 2010, and it spent two years in negative territory. In contrast, Australia’s credit growth peaked at almost 25 per cent of GDP in 2008 – substantially higher than the USA’s at the time – and then fell to plus 2 per cent in 2010, but it then bounced, rising to a peak at plus 10 per cent in June 2012.”

    http://www.businessspectator.com.au/article/2013/8/19/economy/will-housing-souffl%C3%A9-rise-twice

  2. It is possible that baby boomer Kiwis will put their houses on the line to help their kids buy a home.

    • Their kids live and work overseas, but strangely they don’t see the correlation between house prices and Gen X and Y exodus. They also seem to wonder where all these immigrants came from. Very confusing times for boomers, but their increasing personal worth seems to mostly sooth over these issues.

      • disco stuMEMBER

        Thanks to thei interest rates they charged their best and brightest under their ridiculous student loan systems, I know a great many GenX/Y Kiwis who are simply resigned to never returning to NZ to live and work again.

  3. Now as always I make it clear that I am not an economist, so I am asking this just to see how far my understanding goes.

    Wouldn’t this new measure on LVRs hurt First Time Home Buyers ? the quota for Lower LVRs would surely be taken by investors, so house prices might still get higher… leaving FHB to only be able to buy a house when they get a 20% deposit, which even when it sounds reasonable from a financial stability point of view, it may defer their buy for a few more years now.. when house prices might keep increasing so they are worse off?

    Even if it sounds counter intuitive, wouldn’t it be better to prevent Investors to access credit on lower LVRs, effectively putting a bit of a ceiling on how much they can leverage their assets to keep swallowing all available property (say if they are required to use 80% mortgages, then for each property they fully own they can only buy 5 other ones)
    Leaving lower LVR mortgages to be used by FHB only so that they can at least buy their first property ?

    • Competition/demand should dictate the price of those dwellings. While you may be right in stating investors will snap up the houses that FTHB cannot buy because of the LVR measure, the investors will likely pay less for them as they do not have to outbid the FTHBs.

      To put it another way, the LVR measures only decrease the amount FTHB’s can purchase with. This lowers demand and should lower prices. Eventually current FTHB’s will save a sufficiently high deposit and will return to the market with their previous buying power. If as you suggest, they return in a few years time, it is likely prices will be lower than they otherwise would have been had those very same FTHB’s bid up the prices years earlier.

      If in an alternate universe, the LVR measures were not put in place, but the FTHB’s (all of them) decided not to buy for a few years, then after those years they would have much larger buying power. They may well outbid investors then, but the properties they purchase (unless new) will give the previous owners more money to invest again and will cause a bubble.

      The drag effect of the LVR measures should offset part of the current demand for a few years. This should lower costs or at the very least decrease the rate of price growth.

      • Great response, thanks PhilW !

        Although I still think that only allowing Investors to access 80% mortgages would be a good idea to reduce the leverage and the “outbid power” they have on the market….

      • Something I have yet to get an answer for.
        These investors, who are now going to snap up the properties that the FHBer’s may not be able to, how do they do that? If they have 20% cash for another renter – maybe…. Is the bank going to look at the net equity of WHOLE portfolio when it assesses the 80% it is being asked to kick in for the latest aquisition? If the previous renters have been accumulated when 95% LVR was the go, then any investor might find that a current snapshot of their portfolio doesn’t get within cooee of the 80% they might be need to get the additional funding.
        But time, and someone who knows, will answer my question.

      • Janet, re:

        ” Is the bank going to look at the net equity of WHOLE portfolio when it assesses the 80% it is being asked to kick in for the latest aquisition? If the previous renters have been accumulated when 95% LVR was the go, then any investor might find that a current snapshot of their portfolio doesn’t get within cooee of the 80% they might be need to get the additional funding.”

        My guess is that because the RBNZ is wearing its prudential regulator hat in respect of these rules, it will really be a question of whether the new loan asset of the bank is sufficiently collateralised (i.e. over 80%). Where the borrower has previously accumulated a number of buy-to-let properties which are cross-collateralised (i.e. the ‘equity’ in each one has been used to secure each subsequent one), the only way of determining whether the loan is >80% LVR is to look at the MV of the whole portfolio of security and the total loan balance.

        If the previously purchased houses are not cross-collateralised (this is uncommoon in Australia, from what I understand), then it should be possible to make the assessment on a house-loan by house-loan basis.

      • As I suspected then. These “investors who are going to snap up the bargains” probably won’t have the capacity, as they are most likely to have done as you outlined – cross collateralized. So there’s two segments now missing from the property market with theses new regulations – (1) the FHBer and (2) the Investor who has a portfolio with less than 20% portfolio equity. And as property prices ‘ease’ then there will be more and more joing Category 2, and more escaping Category 1. All good….

      • I really think that the net effect of these measures is unpredictable and hangs in the balance…. The options seem to be:

        1) the majority of kiwi speculators and FTBs just see these rules as a hurdle to be worked around and the workarounds are available (e.g. non-bank/non-prudentially regulated finance companies offering second mortgages are quick to get their product to the market), then nothing changes. Except that some if the risk is transferred from the big 4 banks to the finance companies.

        2) the majority of the speculators get confused or panic or the alternative finance providers are slow to market – housing loses momentum, dips significantly and the game is over. The dip will make borrowers more cautious and the alternative lenders less willing to hold second mortgages. Housing enters a down phase.