RBNZ’s mortgage caps are working

ScreenHunter_01 Mar. 22 09.40

By Leith van Onselen

I noted last week how the Reserve Bank of New Zealand’s (RBNZ) speed limits on high loan-to-value ratio (LVR) mortgage lending were showing early signs of success, with the latest housing loan approvals data from the RBNZ suggesting that mortgage demand was falling as evident by year-on-year growth in the number of approvals (-5.8%) slowing to the lowest level since the week ended 1 April 2011:

ScreenHunter_380 Nov. 22 11.09

Now John Bolton, principal of New Zealand’s Squirrel Mortgages, has come out supporting this view, also warning that the new caps introduced in October would “bite much harder” than many people realise, and predicting price falls in the new year on the back of weakening first home buyer demand. From Interest.co.nz:

The latest monthly BNZ-REINZ Residential Survey showed that since the LVR limits came into force first home buyers had deserted the market.

Bolton said there were “bound to be more negative headlines in the press over the coming months”.

“We are starting to get the odd comment about auction clearance rates dropping below 50%, which is a huge signal.  I suspect we will get our first average price fall reported in January.

“…Bank economists pooh poohed the RBNZ approach and said it wouldn’t work.  Many are still sceptical and think this is a temporary aberration.”

First home buyers were “clearly” out of the market, Bolton said.

“Almost nobody can buy with less than a 20% deposit… We still have pre-approvals out there for some existing clients above 80% but these are running out fast.

“We’ve had good settlements in October and November due to our pipeline.  But, when it comes to First Home Buyers our pipeline has been dropping rapidly.  In terms of new approvals we are down about 50%.  This will bite”…

Bolton said latest media coverage “would suggest we are heading fairly quickly back into a buyer’s market”.

RBNZ Governor, Graeme Wheeler, has repeatedly stated that the LVR caps are a temporary measure only aimed at cooling the housing market while the Government moves to free-up the various constraints causing New Zealand’s land/housing supply to be constipated.

In my view, Wheeler and his team at the RBNZ should be applauded for the responsible actions they have taken. While the LVR caps are no panacea – a point acknowledged repeatedly by the RBNZ – they do provide the essential pressure on Central and Local Government to get on dealing with land supply and infrastructure financing issues, so that affordable new housing can be built. Along with the ongoing “moral suasion” about the dire need for policy reform, the RBNZ has effectively stung New Zealand’s politicians into action, with housing affordability now front-and-centre of the political process.

It’s a lesson that should be received by the Reserve Bank of Australia, rather than it playing the role of apologist and supporter of Australia’s overpriced housing.

[email protected]


Leith van Onselen


  1. Leith … thank you for an excellent article.

    We are extremely fortunate in having a person of Graeme Wheeler’s integrity and ability as Governor of the Reserve Bank of New Zealand.

    MB readers need to read the extensive comments to the Interest Co NZ article as well.

    Hugh Pavletich
    Co-author Annual Demographia International Housing Affordability Survey

  2. The RBNZ speed limits on high LVR mortgage lending is a step in the right direction.
    However the fact that FHB are absent & sales numbers down indicates a failure.
    Policy changes should result in sales stable or even increase if anything.
    FHB are still priced out by the high inflated price of RE.
    When prices actually drop to reasonable income ratios then job done.
    Seems NZ has same investor advantage + foreign buyer pressure distorting the market.
    Until that broader range of issues is sorted, it is Groundhog day.

    • That’s a failure of government policy, not the RBNZ, which only has a very small toolkit. But by not juicing credit, they have put the pressure right back on the Government to embark the kinds of reforms that you have alluded to.

        • Is this the same Ian McFarlane (sic) as the Ian MacFarlane who headed the RBA and allowed the inflation rate to run away rather than spiking the interest rate lever that might have put a stop on the out of control credit in Australia during the early noughties?

          • Yep, same IM.
            RE price inflation really kicked this time about 2000 – see:
            I just checked RBA stats for 1990 – 2013 (D5 Lending & F5 Indicator Lending Rates) and inflation (credit growth rate) really took off after about 2000.
            Interest rates dropped from 17% to 6% (1990 – 1999) and has since ranged between 6 & 8%.
            International rule changes to loosen credit & our dumb tax system have more to do with the housing bubble than the RBA. Does not help that it is asleep & therefore part of the problem though.
            My main point is that the RBA could never write a submission like the one in 2003. It has been a long fall to where they are now.

      • UE and H&H … It seems people need to have it clearly illustrated to them, the sheer destructive quantum of bubble mortgages they are taking on board unnecessarily in bubble markets … with the Median Multiples foundation.

        There is no future in mortgage slavery. It is simply a poverty creation programme.

        Hugh Pavletich

  3. The comment from the above article that is important is “..Almost nobody can buy with less than a 20% deposit…” It’s not FHBers, as such. It’s anyone who wants to buy their first property; or subsequent properties, and that wants to trade-up or trade-down. Without the capacity to pay, sales fall; prices fall. Are there still buyers with more than 20% deposit? Sure! But not as many as there were when the limit was 5%, be they owner/occupiers or ‘investors’…

  4. Working for whom?

    They are talking about house price falls, destroying the asset value of about 2/3 of the adult population who have worked hard to pay off debt under the regime that existed over the years.

    The price falls will also impact on the children of the adults who own the properties that fall in value. Their dependent children will suffer on any sale of the current home when the parents possibly lose some or all of the equity in their existing home. Their children who inherit will not get as much, so they too will lose, possibly doubly as they also lose equity in their own homes.

    Renters will probably also lose in two ways. There will be less new property as there is less incentive for people to buy additional properties to rent if there is less likelihood of capital gain. They may also face increased rents due to falling supply of rental property and as existing landlords with losses of equity and asset value take advantage of any situation which enables them to increase rentals to make up for the shortfall in expected capital gain.

    And who benefits? About 3% of the population each year at most as they will be the ones who get cheaper entry prices than otherwise.

    The orderly market will be destroyed as housing values fall as there is no incentive to “catch a falling knife”. Deflating asset prices always leads to a further withdrawal of buyers who retreat to the sidelines to wait for the values to stop falling, or at least to have fallen so far that there is a good chance of a near term rebound.

    The cure could well be a lot worse thatn the complaint and for a lot more people than benefit over the first 20 years of this change.

    • They are working for the future of New Zealand. How many more future New Zealanders do we want to put into indentured mortgage slavery? Asset prices can’t continue to outstrip the wage and the production of the country indefinitely. On that count alone, this property lunacy MUST come to an end at some stage. If that happens to be now, rather than later…so be it. (NB: Anyone who hasn’t been listening to what the political parties have been saying over the last couple of years – ALL of them, and the central bank only has themselves to answer to if they refused to see that the winds of change were about to come to the New Zealand property market , one way, or another…and this policy is better than the alternative… of utter collapse…)

    • Explorer,

      Ultimately, your argument boils down to little more than a plea to retain a distorted and dysfunctional market because some people have benefited from it.

      The same can be said about ANY dysfunctional market.

      Are you generally opposed to microeconomic reform.

      While I am lukewarm on policies like MP that seek to manage demand because they invite claims along the lines of the ones you make, if they drive the true reforms that are required – improved supply of land and less subsidisation of asset price speculation (as against investment in new capital stock) they probably have some merit.

      The critical reform remains policies that encourage flexible and responsive supply to changes in demand (especially increases).

      What objection do you have to such reforms?

      Beyond that a functioning market is likely to place downward pressure on the price of a key input to the national economy.

      Keep in mind that all those property investors will still receive rent from their investments even if the appreciation in the capital value of the asset is slower than they would prefer.

      If they are concerned that some sensible policies are on the horizon the appropriate response is to sell the asset now before the possible becomes probable.

      • I am simply pointing out that there are risks to a large number for a benefit to a very small number per annum and the law of unintended consequences could well come into play and bring about now the very problem that is expected in the future if the current steps aren’t taken.

        Cant be any harm in putting both sides of the story!

        Much worse to argue for policies without ever talking about the people who are disadvantaged and the extent of the disadvantage they will suffer.

        By the way, in a democracy virtually all markets are distorted by regulation, taxation, subsidy, unique standards, disease control etc etc.

    • Explorer. You generally make sensible comments, however, this is not one of them. Your support of ponzi-nomics is laughable. Do you honestly believe that an ever-inflating cost of shelter based on easy credit, tax lurks, and a quango of artificial supply-side distortions is the way to run a successful economy and good for the social fabric?

    • The so-called ‘orderly market’ is nothing more than evidence of irresponsible quantities of bank credit and tax policy gone mad.
      In little over a decade, RE prices have doubled and tripled in certain areas.
      Incomes have gone up on average about 40% – way less than 200-300% RE price hikes.
      Can we just quit with this idea of having entitlement and ability to inflate the cost of shelter at x5 times the rate of wage growth?
      Can policy makers get that much decency into decision making?

    • Explorer … bubble value is not real value.

      It vaporizes … as do the sad souls who play the bubble game.

      They are incapable of making real wealth in property.

      That’s why those who play the bubble game are simply referred to as “stack-up merchants”.

      Hugh Pavletich

  5. “… there is no incentive to “catch a falling knife” No there isn’t. But that’s what the New Zealand property market has become; razor sharp, and unless we see it for the knife that it is, too many gullible New Zealanders will see it as a Magic Wand, to be caught before someone else does. Someone else that will reap the rewards of its mystical powers. It’s a not a wand, and anyone who now wants to have a grab for it on the way down will likely lose a finger or three….

  6. Given that the RBA and government are explicitly and implicitly supporting our banks via MBSs and other measures, how’s about a requirement for all supported MBSs to have an underlying 80% LVR – would that help?

  7. how do you call that, FHB pushed to the waiting line by the RBNZ ?, Demand pushed backward.

    Investors will now have access to better deals, without competition and will offload later on when the stock of potential FHB will be so humongous that prices will rise again with or without RBNZ’s approval.Thanks to the RBNZ this year was really a case of get it now or get priced out ( of loan approval) “forever”.

    you have to love the RBNZ, smart move (unless you re FHB of course).

    • What happens if, as the RBNZ is making clear, mortgage rates rise as early as March next year? That will further suppress the capacity of the FHBer – and everyone else that is debt dependent for their ability to buy. Now, of course, that leaves those with the “FHBer advance stock” – the Falling Knives – also holding on to an increasingly expensive carry trade. Just as the RBNZ telegraphed the LVR changes, so it is doing – interest rate rises. (and No, higher rents won’t be the salvation of those with rental stock. Rents aren’t cost dependent; the are income dependent)

      • Rates will not rise if prices get stabilized by the removal of FHB ( until the FHB on the side line get crazy high and jump in no matter( you only need one successful bidder per home))

    • Do you actually read the articles before you post a comment dam?

      How will investors get access to better deals when LVR’s across the board are capped at 20%?

      FHB were already priced out before the caps were implemented. Investors don’t have much competition as it is.

      • because they do bring more than 20% already ( and have equity already) they are not impacted adversely by the rules, less competition = better deals, the RBNZ could not make it better for investors.

        FHB were not totally priced out, they were seen at auctions before the ruling, now it s more a gentlemen club.FHB are the ones who can push the prices to unreasonable level by being emotional, investors are usually more rational/ less attached.

        • They still have to pony up at least 20%, even if they use equity. And those without 20% value in equity will have to use other income to make up the balance. I don’t know of many investors who would be comfortable doing so in a falling market.

          FHBs were not there in sufficient numbers to be competitive with investors before the caps were implemented. Why would there be sufficiently less competition now? Doesn’t make sense.

        • Less demand = less house price inflation
          less house price inflation = less equity for investors
          less equity for investors = less ability to leverage up & buy more property
          not such a great outcome for investors after all

          FHB might be the first impacted by the MP policy but it has an overall effect on the housing market.

        • But their ability to leverage Other Peoples Money to get capital returns is lessened. Their commitment levels must be higher.

          As prices start to stabilise, this is a less and less attractive proposition.

      • @dam God forbid, if prices start to stabalise, the investors won’t even have a reason to invest …

  8. “A Sheep Called Alice” … superb Australian Broadcasting Corporation documentary

    “A Sheep Called Alice” … Australian Broadcasting Corporation Documentary


    “The landscape of a farm” … Nan Bray …


    This is a remarkable story of how an outsider, questioning the accepted wisdom, comes in to an industry to revolutionise it.

    Nan Bray, an American marine physicist leading the team with the Australian Commonwealth Scientific and Industrial Research Organisation (CSIRO) | CSIRO in Tasmania, took an interest in the farming of Merino sheep, bought a run-down property and went from there.

    She works closely with Australian wool industry legend Davey Carnes, a sprightly 87 year old … melding the old with the new with wonderful debates along the way.

    The major message here is Nans “powers of observation” … in learning real sheep behaviour and how they relate to their environment.

    The better the sheep are treated, the better they perform and the higher quality of wool they produce ! A very moving story for this former farm worker and wool-classer (refer brief biography end of Annual Demographia Survey) !

    Now … if only urban planners, economists and others associated with urban land use could be trained to observe ( view also the great interview with the late economist Ronald Coase … Ronald Coase Interview With CEI Founder Fred Smith … http://www.youtube.com/watch?v=fpfi0gsTjrs ) and learn how people actually live within an urban environment , we might start getting somewhere in solving our urban problems and issues.

    We pay a high price for people being trained (and sadly … too often indoctrinated) in isolated fantasy factories.

    Hugh Pavletich
    Co-author Annual Demographia International Housing Affordability Survey
    Performance Urban Planning
    New Zealand

  9. So they took the heat out of prices by locking out first home buyers. Meanwhile investors are not locked out, so they can snap up more property cheaper. Ultimately, the first home buyers will have to pay more as the heat returns with investors. Will this really make things better long term?

    The only genuine solution is more supply of housing. Anything else is a fools paradise of market manipulation.