The pros and cons of macroprudential

By Leith van Onselen

Following on from Houses & Holes’ earlier post summarising Reserve Bank of New Zealand (RBNZ) modelling showing a potential 4% hit to house prices arising from its speed limit on high loan-to-value ratio (LVR) lending, above is an interesting short video of Interest.co.nz’s Gareth Vaughan explaining the changes and some of the likely impacts.

In short, Vaughan sees only modest downward price pressure from the changes, with prices continuing to be supported by record low interest rates, high population growth, and housing shortgages in New Zealand’s two biggest cities: Auckland and Christchurch.

Vaughan also believes New Zealand will experience some some form of ‘regulatory arbitrage’, whereby attempts are made to circumvent the rules. In particular, finance companies are likely to emerge offering top-up loans at higher interest rates, as occured in the 1970s when credit was restricted.

Vaughan also notes that New Zealand banks have already been slowing high LVR lending in anticipation of the changes. Mortgages above 80% LVR had accounted for 30% of new lending, but over the past few months it has come down to less than 20% – a view supported by the aggregate housing finance data, which shows a clear slow down (see next chart).

ScreenHunter_15 Aug. 21 09.00

Interest.co.nz’s David Hargreaves has also expressed reservations about the LVR changes:

The first time buyer will be affected by this new policy. But investors will not be affected at all.

Anybody who can make more than a 20% deposit – and that’s most investors – will not be impacted by this. Likewise, overseas buyers with plenty of cash – and we still don’t know how many of such people there are really – are likewise not affected.

The interesting point here that has certainly been raised by Westpac economists and possibly others, is that we could see development of a two tier mortgage pricing market.

Potentially the low equity people might have to pay more, but those with plenty of equity could find the banks bidding for their business.

The thing is the banks won’t want to see their lending growth halted by this measure. So, the high equity buyers might become the “low hanging fruit” of the new post-LVR marketplace.

Because the banks might be desperate to keep upping their lending, they will be prepared to give sweet deals to the high equity people. This of course would be likely to INCREASE demand for houses. So prices might even go up more.

For the low equity people it becomes about trying to find money from somewhere else to make up a deposit of sufficient size. And I really worry about what will happen here.

There are already signs of new financial intermediary businesses setting up, some from offshore.

Last housing bubble we had the finance companies and we know what happened there.

This time it will be different and the victims are not likely to be savers but the people who desperately want to get into a house and so are prepared to source money from a nice smiling man wearing an outsized suit to mask the shark’s fin on his back…

Therefore, as I see it, there are two very likely and unpleasant consequences that may come from this move. Firstly, there will be renewed competition from the banks – but for high equity customers, which will drive the housing market onward.

Second, the low equity customers will end up getting money from, shall we say, dubious sources and at least some will get themselves into a lot of trouble.

The good thing is that the RBNZ can pull the plug on this any time it likes. I think it will be forced to sooner rather than later. I don’t expect we will see this policy maintained beyond March next year.

And I think the RBNZ is going to have to push harder on the interest rate accelerator from early next year than most people are currently forecasting.

This is one experiment I think that is going to blow up in people’s faces.

Personally, I fail to see how the changes would increase demand for credit and put upward pressure on home prices, as prognosticated by Hargreaves. Although, I do see his point about the potential for unscrupulous lenders emerging outside of the regulatory net.

Ultimately, the RBNZ’s reforms are a mitigant rather than a fix for New Zealand’s housing market. As long as structural barriers blocking the supply of land/housing remain in place, as well as tax policies that preference housing investment (e.g. negative gearing), New Zealand homes will remain unaffordable for large sections of the population, and the economy will be vulnerable to housing booms and busts as demand rises and falls.

[email protected]

www.twitter.com/leithvo

Leith van Onselen

Comments

  1. I guess the objective of the RBNZ reforms is to ensure that the banks that operate there are not overly exposed to falls in house prices. If this happens to have an effect on house prices, then this would be a benefit to first home buyers, but is an effect that the RBNZ would be seeking. They are more likely to want a decline in the rate of increase, relative to incomes, that rather than an outright fall.

    If this policy was introduced here by APRA, we could expect our political class to listen to the whining of the FIRE sector, and rapidly introduce their own equity contribution (FHOG anyone?). So that values and volumes stayed high, at least until the supply of credit dries up.

  2. We are already getting ads on TV from previously dormant non-bank lenders eg: FMT (below). If this follows the pattern of the last lending squeeze (it likely will!) then expect the demand for deposits from such non-bank entities to increase, to fund the ‘new’ lending. As Hargreaves notes,”This is one experiment I think that is going to blow up in people’s faces” and I’m not sure New Zealand can afford it…
    http://www.firstmortgagetrust.co.nz/cs/default.asp