RBNZ refines LVR cap. But will it work?

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By Leith van Onselen

The Reserve Bank of New Zealand (RBNZ) has released further details on its plan to put “speed limits” on high loan-to-value (LVR) lending, which has recently accounted for around 30% of new lending over the past year. Under the proposed changes, mortgages with an LVR of more than 90% would still be restricted to 5% of new lending, whereas total new lending over 80% LVR would be restricted to 12%. However, banks would be allowed a six month window to slow lending once the reforms are implemented, in recognition of the fact that banks could have a pipeline of pre-approved loans. After the initial six month period, banks would then be required to comply with the rules on an average basis over a three-month period.

The RBNZ has not signalled when the LVR rules would come into force, however, most analysts expect them to be implemented before the end of the year.

A number of bank analysts have raised doubts over whether the LVR rules would be effective in slowing the rate of house price growth, instead noting that low interest rates and housing supply shortages, particularly in Auckland and Christchurch, would continue to drive house prices upwards in the longer-term. From Banking Day:

“We expect the introduction of a speed limit on high-LVR lending will only have a modest impact on house prices, and we will continue to see continued housing market pressures over the coming year,” ASB Economist Christina Leung said.

Westpac Economist Michael Gordon said the speed limits would lead to a bi-furcation of mortgage pricing with cheaper mortgages under the 80% threshold and bigger premiums above 80 per cent, which may encourage more borrowing in the lower category.

“So we suspect that, over time, house prices would be bid up to much the same levels as they would in the absence of LVR restrictions – perhaps at a slower pace, with fewer competing bidders, but ultimately reaching a similar end-point,” Gordon said, noting however there could be a short term ‘sticker shock’ of lower lending growth and housing sales in the three to six months after the speed limit is introduced.

“Any such short-term impact wouldn’t change our overarching views on the housing market, nor should it be taken as a sign that LVR limits can ‘fix’ the housing cycle,” Gordon said.

As noted on Monday, New Zealand mortgage growth already appears to be slowing, with year-on-year growth in loan approvals turning negative over recent months (see below charts).

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In fact, this slowdown in lending appears to reflect rationing by banks of high LVR loans in the lead-up to the poposed changes by the RBNZ. According to Banking Day, mortgage brokers reported that the slowdown in lending began in June shortly after the RBNZ agreed its ‘toolkit’ of macro-prudential tools with the Government.

That said, while rationing high LVR mortgages will help in moderating price growth via reducing mortgage demand and competition in the marketplace, the brunt of the impacts from these changes would be felt most by first home buyers, who don’t have pre-existing equity to tap into. In this regard, making new homes more affordable via supply-side reforms is essential, as articulated by New Zealand’s housing minister, Nick Smith, over the weekend:

Let me give you some of the facts on why freeing up land supply is a must-have component to improving housing affordability.

We released in February a joint Government/Council study on section availability and price in Auckland.

It showed that the number of available sections in Auckland has plummeted from 4,100 to 1,400 in the past decade.

Remember we need 13,000 new houses per year to keep up with Auckland’s population growth.

The same study showed section prices soared from $100,000 to $325,000…

Further evidence of the land supply problem is in un-improved land values.

This block of 29 hectares of land at Flatbush was bought in 1998 for $890,000 but is now on the market for $112 million.

That’s a 38 per cent compound return for 15 years.

No wonder people are speculating on land prices.

This obscene raw land price is the product of Auckland’s Metropolitan Urban Limit and comes at the cost of kiwi families wanting to own a home in our largest city.

The rationale for such a tight urban limit around Auckland is flawed.

Auckland’s future will be a mix of greenfield and brownfield developments, but we must not let rigid planning dogma get in the way of affordable homes for kiwi families…

We must also tackle the costs of council development levies.

They have trebled over the past decade, rising faster than any other component cost of a completed house.

They now average $13,000 per section but are as high as $64,000 per section in some areas.

The cause for this was a law change in 2002.

It gave licence for councils to charge developers whatever they liked.

The then Government argued this cost would just come out of developers’ margins.

In truth, the cost was just passed on to the section or home buyer.

I have written previously about the deleterious impacts arising from the Auckland Council’s policies of restricting the urban footprint, so I won’t cover new ground. What I will say is that Auckland is already densely populated by Anglo standards (see below chart), casting doubts over the efficacy of the Council’s drive for urban consolidation in light of the city’s already sky-high housing costs.

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As an aside, it’s also interesting to contrast New Zealand’s politicians with Australia’s. While housing affordability is front-and-centre in New Zealand, Australia’s major political parties have remained completely silent in the lead-up to the Federal Election.

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Unconventional Economist
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  1. At the next election – I will give my vote to Nick Smith!

    This man has earned my vote, and I’m not even a NZer.

  2. New Zealand has taken the Idi Amin solution. If supply doesn’t match demand, then hide demand. Out of sight out of mind.

    I’m sure that there are plenty of cashed up investors in Auckland willing to buy more investment properties to take up the slack in buying capacity.

    • You might be surprised as to how few New Zealanders are cashed up to buy, anything, Peter! Most people I know, by a wide margin don’t have much cash at all – even very wealthy ones. They have 1,2,50 properties that account for all their cash/wealth. We aren’t a very rich country at all – that’s the real problem. But we have debt on a per capita basis that rivals; no, exceeds your own populations. And most of it is advanced by …your banks.

  3. There is only one thing that matters in any property purchase – the capacity of the buyer to pay. That capacity is split into two components; the cash component and the debt component. Anyone who can pay 100% cash can only do so if they are permitted (residential status etc) and anyone who requires a debt component has to be assessed on a debt to asset basis ( LVR) and an income to debt basis ( the ability to service the debt). Of all of those, the RBNZ, if indeed it ever does anything at all, is addressing but ONE of the components. Look at all those other ones; those that will go unaddressed, and tell me that there won’t be ways around the solitary suggested change. LVR may look like something is being done, but in reality…it will make no difference in the grand scheme of things.

    • Only supply matters Janet, the rest is of little consequence in a well supplied market.

      I guess the RBNZ have acted out of frustration, but they are using an engineers hammer to refit a minute screw in the back of a watch, when what Auckland needs is more watches.

      • If there is 1 property for sale @ $100,000, Peter, and 100 buyers, none of whom, no matter what race they are, have access to $100,000 in any form, but they all want the property, what will it sell for? Supply 9 more at $100,000 and what will they sell for?
        The answer is that it/they will sell at the first level that the eager buyer can pay at = cash/& or + debt. LVR addresses ONE of the components to the capacity to pay. The others need addressing in tandem. Do we need more supply? Possibly. When I was growing up we lived at 4+ per household. Today it’s 2.5. So the spare capacity is there is we choose to use it. If we don’t, then sure we can build more. But wouldn’t it be better to more efficiently use what we already have? Yes, is my answer.

      • Auckland is not a well-supplied market, Peter, hence the point of the entire thread, article, policy and discussion.

        Your comment is basically “no need for LVR limits because in a perfect world, they aren’t necessary”.

        Banks and mortgage brokers naturally oppose LVR limits because it reduces the supply of clients through the door. But in the absence of a perfect world, LVR limits should help address one aspect of the problem.

      • As always Janet it will sell to whatever the highest bidder will pay. You automatically assume that if you restrict a few buyers from entering the market, then no one will be able to afford the price, that just isn’t so.

        Did you know that for most of the seventies the CBA had a loan cap in place of just $9000 and house price inflation was going nuts – go figure.

      • Arrow2 I couldn’t give a toss about the Auckland market. My point exactly is that the market is clearly undersupplied, and no amount of superficial masking of that undersupply by artificially restricting a small segment of buyers will have any real effect.

        I have observed this scenario before.

      • +100 Arrow2, you nailed it.. and you didn’t even have to use a hammer.

        (As for PF, that Upton Sinclair quote is quite apt for this occasion too)

      • That’s the shot mav, it’s far easier to slur someone than it is to provide hard argument or facts. When was the last time that you brought some actual data to the table instead of worthless innuendo?

        I’ve actually never seen that happen. Do you have a link less than a decade old?

      • Exactly, Peter! It will sell for whatever the highest bidder CAN pay. So it’s not a supply issue at all. It’s a payment issue.
        Re the CBA – I can’t comment too much at all. In the 70’s in Aussie there were income to loan caps (as well as outright loan caps perhaps?), so that only the prime income earner ( the man!) was assessed for a loan. But I do recall that Australia had a period of stagflation that saw politicians become flexible ( the second income came in to play etc) that allowed the banks’ loan caps to be eased. Inflation generally took off, but the populace had the capacity to absorb more debt. What was it? 35% of household income or such? Today it’s what,150%? Where’s today’s capacity to absorb any more debt except intergenerationally, 50 year mortgages. There’s not much else left!

      • Yes it was assessed on the males income only, except for short term commitments, there has always been flexibility.

        It’s not really true to say that loan serviceability was assessed on a fixed proportion of the bread winners income, that was the starting point for the assessment and then mitigating factors were considered. It’s often quoted that lenders had a fixed ratio of 30% of the bread winners income – essentially that is crap that inexperienced branch lenders had indelibly tattooed onto their neurons. Head office had more flexibility than that and branches had little or no DLA.

        The relaxation in lending didn’t come until after the Keating reforms and equal opportunity laws were passed.

        The natural constraints on lending should be capacity to repay, value of security offered, and credit worthiness of the borrower. If the RBNZ want to cap LVR levels to help make the banking sector more rigid then that’s fair enough, but as I read this it’s a desperate attempt to keep a lid on house prices and the effect will be minimal at best. The market looks as though it is maxing out anyway.

  4. reusachtigeMEMBER

    This will just make it easier for all those cashed up foreigners to buy up, there’s plenty of them willing and able.

    • +1, and will also increase the demand of rental stock and lock in a generation of renters who will pay higher rents than they would have if the LVR restrictions were not put in place.

      Bad policy by RBNZ.

      • How will it necessarily cause rising rents? Just because less FHBs will buy doesn’t meant that overall housing supply will fall, seeing as they overwhelmingly buy pre-existing homes anyway.

        It’s more likely that the proportion of investors will rise, leading to more rental properties being available, which will then be filled by FHBs locked-out (i.e. the rental supply-demand balance will remain largely unchanged).

      • One possible side effect could be less house being built, which has later repercussions. Investors want a return from day one so they prefer existing houses rent ready, not new builds where they wait 6 months and then have to establish lawns and gardens. Nor do they want to lock in a 10% deposit on an off the plan buy that might be one or two years away from completion, and usually overpriced at todays prices.

        If they wanted to place LVR restrictions on the market they would have done better by restricting all loans to 90% to give greater structural rigidity to the system, and take away the lottery aspect for those seeking 95% loans, whilst giving certainty to those wanting between 80% and 90%. People need certainty.

        Clearly this is a committee outcome.

      • It is a ham-fisted approach, I agree with you on that, Peter. And let’s not forget, the RBNZ has been talking about this for over a year, and still hasn’t actually done a blind thing about it yet. Meanwhile thousands of New Zealanders have entered the marketplace at up to 10% more than the purchase price last year, and I’ll wager than most of them have LESS disposable income this year than last! You say ” Am I still waiting for a collapse!’ and I reply “Yes I am!” and more so this year than last, and the longer this lunacy goes on, “the bigger they are, the harder they fall” will become a lesson that many will remember for a long time.( Many New Zealanders STILL haven’t gotten over the Crash of ’87 ! That’s why we don’t have much of a stock market)

      • On the other hand Janet the RBNZ has probably been waiting on the politicians to do their job. The RBNZ can’t dress axe wounds with an asprin no matter how hard they might try.

        High property prices seems to be a global phenomena, and a quick fix could be worse than a cure.

        Take care crossing the minefield Janet.

  5. Ronin8317MEMBER

    While the intention is good, the LVR limit will create a new industry for ‘unsecured loans’ by unregulated credit entities to reach the magical 20% LVR, followed by a ‘reverse mortgage’ to pay back the loan.

    • Well,nothing to worry about with that kind of over-extension! But I repeat: We are the lab-rat for your property market. Look and see how it goes here; what works, and what doesn’t – because it is more than likely that it will then come to you as well.

  6. I admire the Kiwis. They recognise leverage is a problem and they’re doing something about it.

    It’s just smart not to allow too many high LVR loans in the system. These are the highest risk loans in a downturn.