RBNZ aims for housing slow melt on China risk

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By Leith van Onselen

The Reserve Bank of New Zealand (RBNZ) yesterday released its biannual Financial Stability Report (FSR), which warns on housing risks and assesses the initial impact of its speed limits on high loan-to-value ratio (LVR) mortgage lending, which were implemented on 1 October 2013. According to the RBNZ:

“The main threat to the financial system is the risk associated with imbalances in the housing market. The previously announced loan-to-value ratio (LVR) measures, starting from 1 October, are intended to reduce systemic risk by slowing housing credit and house price inflation, and by reducing risk on bank balance sheets.

“The household sector has high and rising levels of debt relative to both historical and international norms. Both households and banks are highly exposed to the housing market. Further, we have a situation where house prices are rising from already-overvalued levels, particularly in Auckland and Christchurch. This is increasing the risk of a future house price correction that could result in significant financial system stress.

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House prices are currently high by historical standards (relative to fundamental measures), and are overvalued by international comparison.

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[RBNZ Governor, Grant Wheeler] said that several factors are contributing to the strength in house prices, including supply side constraints, a pick-up in net inward migration, relatively low interest rates, and relaxed credit conditions. “Dealing with the supply side issues is of primary importance. However, it is also important to avoid a prolonged build-up of excess demand while the supply issues are being addressed”…

If unchecked, further near-term growth in house prices increases the likelihood of a disruptive adjustment in the housing market. Periods of large nominal house price declines have been experienced by a number of advanced countries over the past 40 years [see below]. More recently, the GFC has highlighted the severe financial and economic damage that can arise from a rapid correction in house prices, as witnessed in the US, Ireland and Spain, where prices fell by 30 to 40 percent. In the US, for example, a quarter of borrowers found themselves in a position of ‘negative equity’ – owing more than what their houses were worth.

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The increase in housing demand that has helped to fuel rapid house price inflation, has been enabled by an easing in bank lending standards and an increased share of low-deposit, or high-LVR, residential mortgage lending. High-LVR lending accentuates loan losses and worsens the subsequent economic disruption when overinflated house prices correct abruptly. High-LVR lending reduces the margin of collateral above the value of the outstanding loan and this margin may become negative if house prices fall, leading to loan losses for the lender if the borrower defaults.

High-LVR borrowers often have a higher debt servicing ratio – apportioning a higher share of their disposable income to meet their principal and interest payment obligations  – so are more vulnerable to financial or economic developments such as a sharp rise in interest rates, or a change in their employment circumstances. High-LVR borrowers are therefore more likely to be forced to sell when house prices are falling, reinforcing the wider house price adjustment…

Mr Wheeler said that the Bank is closely watching the impact of the LVR policy. “The early evidence shows that banks have significantly reduced high LVR lending approvals, while increasing the cost of high LVR loans. However, it is too early to assess the impact of the measures on house price inflation”…

Separately in a Finance and Expenditure Select Committee (FEC), RBNZ Governor, Graeme Wheeler, noted that he is targeting a slow melt for house prices. From Interest.co:

“If we had inflation currently at around 1.2% at an annual rate and we have an objective under the Policy Targets Agreement of maintaining inflation over the medium term in the order of 2%, then you wouldn’t want to see house prices for the country as a whole growing at around 10% as they are at present. You would want to see a figure much closer over time to the level of Consumer Price Inflation,” Wheeler said.

Wheeler agreed the bank would not want to see signficant falls in house prices. He pointed to OECD research showing New Zealand’s house price to disposable income ratio of around 4.5 was above its levels of 2.5 in the early 1990s and was 20% above its long term average.

“One doesn’t want to see a significant adjustment in house prices happening quickly, by that I mean house prices falling in nominal terms, which would pose risks to the financial sector. What one wants to do is to slow down the rate of house price appreciation and our measures are basically trying to affect the demand for housing while the supply side comes into much better balance,” he said.

He added the Reserve Bank would like to see the house price to disposable income lower over time.

And he added one of the reasons why:

Reserve Bank governor Graeme Wheeler says a potential downturn in the Chinese economy is the biggest risk to New Zealand and is the type of external shock the central bank wants to protect homeowners from with its restrictions on low equity house lending.

…”What could cause an adjustment here, what could do great damage to the economy and to the financial sector and to the housing sector? The biggest risk, my guess, would be around China,” Wheeler said. “China’s growth slowed from 10 percent on average, what it’s been for the last 30 years, and the issue is can it continue to grow at 7 percent or thereabouts.”

Comparing this with the RBA’s reliance on speeding housing up as China slows and its risks grow does not cast Australian authorities in a favourable light.

Leith van Onselen


  1. The RBNZ has also made it clear, and reiterated yesterday, that the LVR regime currently in place is – temporary. What message do you think that sends to anyone who is looking to increase their speculative portfolio? Graeme Wheeler is not trying to achieve any meaningful changes to the property market. His sole objective is to maintain price rises – he makes no bones about saying so. Until the RBNZ and wider New Zealand publicly acknowledge that what we presently have in our property market has already strangled the wider economy and maintenance, or an increase in it, means certain economic and social death, then this sort of religious adherences to a failed orthodoxy is destined to ruin the lives of many of our people. This is people lives we are talking about here, RBNZ – not some sort of theoretical modelling process. You have a choice – support the sick and destined to die, or spray the economy with 1080 and get rid of the parasite. The RBNZ has left it far too late to tinker around the temporary edges. It, and its present Governor and Assistant Governors, must be solely held responsible for the calamity that is to come.

    • Jeez Janet. Let up. The guy is clearly aiming to deflate the beast without blowing it up and force supply changes as well.

      He’s only been in the job eighteen months and has done more than any central banker I can remember. you can;t balme him for not being a zero hedge guy. That’s nuts anyway.

      • +1 Janet


        I wonder why on earth you believe that it is possible to engineer orderly deflation (soft landing /slow melt) of an already large bubble “without blowing it up”. As I had stated before, it would be simply impossible in a free market, that is, without a giant firing squad of some sort which is powerful enough to prevent people from jumping the orderly arranged queue (unless, I might add, the aim of “investing” in RE is not only to lose money via NG but also to run out of it).

        Of course, if “aims for housing slow melt” means bursting the already large bubble sooner rather than later, then bring it on by all means. By doing so, it might still be possible to salvage whatever is left in manufacturing, etc.

    • Janet, the “sole responsibility” rests with NZ local governments. The next most responsible is the central government. They have known since at least 2007 what the solutions were. The Local Government Act 2002 made the problem slightly worse.

      I fail to see how central bankers can be blamed at all, quite frankly. Don Brash complained in the 1990’s that inelastic housing supply rendered monetary policy an impossible task, and I have yet to see any convincing argument that that is wrong.

      • Phil You have a loop running. As per just about everything in economics it isn’t a straight line phenomenon. The CB’s are part of that loop and play a very active role. Further they are in a position of responsibility and should be attempting to do what’s right. I see no indication in either Aus or NZ that such is the case.
        Edit:Grrrrrrrr I can spell. I just can’t get the fingers moving in a co-ordinated fashion!

    • dumb_non_economist

      I doubt you’d see the level of discipline needed maintained over the time frame required to achieve that.

  2. Got to love the last line on the last graph for people who talk about Hong Kong housing prices as something we should expect for Australia.

    They’re not making any more land in Hong Kong you know.

  3. “The main threat to the financial system is the risk associated with imbalances in the housing market.”
    This is just plain BS. He is talking about symptoms, not the disease, and that’s why Janet is absolutely correct. The main threat to our financial, economic, and social system is the fact we are living way beyond our means, consuming way more than we produce, totally dependent on the largesses and propensity of foreign savers, while our Banking system is a simple monopoly owned and run from London and New York. The whole damned parasite has to be dismantled.
    What Wheeler is planning on is simply more debt and asset sales to foreigners forever which is exactly what Stevens Hockey et al propose.

    “The increase in housing demand that has helped to fuel rapid house price inflation, has been enabled by an easing in bank lending standards ” Right there is the problem! ” It’s not our fault! It’s them there Banks creating high leveraged loans that are the problem!”
    Negative RAT interst rates for mult-idecades have nothing to do with it at all!!!!!!

    This baloney of a slow melt is just amazing. We either do something about reducing our debt or we grow our debt. Growing debt at a slightly slower rate for a short time with an eye to expanding the debt growth rate again as soon as possible is hardly ‘reform’

  4. Guys. National and local Government is supposed to control the economy through policy settings that benefit the present and future population. Ask yourselves, have they; are they? My answer is No. It has been left to the Central Banks to enact policy that should have been the domain of Government, but for all sorts of tragically understandable reasons that has not happened. The central banks, and the RBNZ in our case, have been gifted the responsibility of macroeconomic control, and yes, without the necessary tools to do the job properly ( isn’t that part of the political plan?). What tool they do have they have used most ineffectively. Find me one of you that thinks that the prolonged low interest rate policy of the last 20 years has done any of us any good?! Is the RBNZ going to be solely to blame for what befalls New Zealand? Yes. Because like it, or lump it, they are the ones that have economic control.