RBNZ directly targets Auckland mortgages

More humiliation today for the Reserve Bank of Australia and the Australian Prudential Regulatory Authority as its counterpart in New Zealand does exactly what they should be doing and aren’t, from the RBNZ:

New Zealand’s financial system is sound and operating effectively, but faces significant risks, Reserve Bank Governor, Graeme Wheeler, said today when releasing the Bank’s May Financial Stability Report.

Mr Wheeler identified three systemic risks facing the New Zealand financial system.

“Auckland’s median house price is 60 percent above its 2008 level, and house prices in Auckland have been rising rapidly since late last year. This reflects ongoing supply constraints and increased demand, driven by record net immigration, low interest rates and increasing investor activity. Prices in the Auckland region have become very stretched, increasing the risk of financial instability from a sharp correction in prices.

“A second area of risk for the financial system relates to the dairy sector, which is experiencing a sharp fall in incomes due to lower international prices. Many highly leveraged farms are facing negative cash-flows, and the risks will become more pronounced if low milk prices persist beyond the current season.

“The third key risk arises from the current very easy global financial conditions. Low interest rates are encouraging investors into riskier assets in the search for yield. Prices of both financial and real assets are becoming overextended in many markets. There is an increasing risk that the current benign conditions unwind in a disorderly fashion, disrupting the cost and availability of funding for the New Zealand financial system.”

LVR Restrictions

In response to the growing housing market risk in Auckland, the Reserve Bank is today announcing proposed changes to the loan-to-value ratio (LVR) policy. The policy changes, proposed to take effect from 1 October, will:

Require residential property investors in the Auckland Council area using bank loans to have a deposit of at least 30 percent.

Increase the existing speed limit for high LVR borrowing outside of Auckland from 10 to 15 percent, to reflect the more subdued housing market conditions outside of Auckland.

Retain the existing 10 percent speed limit for loans to owner-occupiers in Auckland at LVRs of greater than 80 percent.

“We are proposing these adjustments to the LVR policy to more directly target investor activity in the Auckland region, where house prices relative to incomes and rent are far more elevated than elsewhere in New Zealand.

“The objective of this policy is to promote financial stability by reducing the rate of increase in Auckland house prices, and to improve the resilience of the banking system to a potential downturn in the Auckland housing market.”

Mr Wheeler emphasised that while the new measures aim to moderate housing demand, policies to ease housing supply constraints in Auckland remain the key to addressing the region’s housing imbalances over the longer term.

Deputy Governor, Grant Spencer, said that the Bank will issue a consultation paper in late May, providing further details and seeking feedback on the new LVR proposals.

“Prior to the proposed introduction of the policy in October, we expect banks to observe the spirit of the restrictions and not seek to expand high-LVR investor lending in Auckland.

“Given the importance of encouraging residential construction activity in Auckland, and consistent with the existing LVR policy, the proposed LVR restrictions will not apply to loans to construct new houses or apartments.

“Consistent with the LVR measures, the Reserve Bank is establishing a new asset class for bank loans to residential property investors. Banks will be expected to hold more capital against this asset class to reflect the higher risks inherent in such lending.

“Following a lengthy consultation process, we have decided that a residential property investor loan will be defined as any retail mortgage secured on a residential property that is not owner-occupied.”

A summary of submissions received in response to the consultation will be released later this month, and details will be provided on the implementation of the new asset class, including on the proposed capital treatment of residential investor loans.

The new asset class will take effect from 1 October 2015 for new lending, with a further phase-in period of nine months for the reclassification of existing loans.

“Given the broader risks facing the financial system, it is crucial that banks maintain their capital and liquidity buffers and apply prudent lending standards. Later this year the Reserve Bank will be reviewing bank capital requirements in light of global and domestic developments affecting the safety of the banking system,” Mr Spencer said.

Bravo. At least somebody knows how to take on Australia’s rampant building societies. The Kiwi dollar is now powering downwards.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Comments

    • Problem is the insatiable thirst aussies have for debt AND the 7-10 year property doubling phenomena is best served by Glenn. RBA statements are full of house price inflation targeting and savers should seek returns elsewhere. Wheeler may actually address risk, stability and equility – all unwelcome here.

  1. Of itself, I doubt this will work – analyse LVR Mark 1! But I do however commend Graeme Wheeler for at least trying something, albeit the wrong thing ( Loan-to-Income (eg:rent) would be a much better determinant. It is already regional, as wages/property prices vary across the country).
    Without fully appreciating it,the RBNZ by making Auckland speculators stump up 30% is likely to weaken the very foundation of the economy that the Governor is trying to protect. It’s far more likely that more and more parents, and indeed other siblings, will make-up the missing deposit amounts with either their own cash or, worse, a pledge of their own property(s). When a Day of Reckoning arrived for asset markets, more than just the actual ‘investor’ will now be at risk of bankruptcy – more, wider families, will now also be.

  2. Competent wheeler vs reckless Glenn. There’s just no comparison beyond them both being CB’ers.

  3. H&H – humiliation??? There seems to be a fact free zone here on MB about NZ… The NZ government have sat on their hands for several/number years – and even in their latest public economic pronouncements haven’t even mentioned property! At least the Government here in Australia are actively talking about the problems here, in particular Sydney – whilst its been actively ignored in NZ, and even denied by Key’s and Co. RBNZ are trying various measure – none will probably work…

    Truth is their property bubble (collectively) is BIGGER THAN OURS. If they don’t act now they never will. When this inevitably goes bust – fingers will be pointed at various individuals. NZ Government in particular – this happened on their watch and they have been in utter denial all this time…

    And the best bit – what a LVR going to mean to a Chinese investor? Absolutely nothing. Have another look at what is going on in NZ – I think you have been misinformed. It makes Australia look good by comparison!

    • Which answers another question posed on MB yesterday “Why is the NZ$ now doing so badly against the A$?” (or words to that effect). Answer : Because the NZ economy is a powder-keg of speculative property just waiting to explode. No one knows how long the fuse is, but we do know how long it’s been burning – since 4th March 1984, is the answer to that. That the fuse is now so hot that the Government daren’t try to de-fuse it for fear of self-immolation just adds to what they and many of us know – it’s only a matter of time….

      • In the latest public announcements by the NZ treasurer – nothing was mentioned about property, just global competitiveness and currency… and secondly, Keys doesn’t even publicly admit there is a bubble. I suppose our pollies don’t either – but its pretty bloody obvious whats happening over there. At least the Government here is doing (maybe a bit strong – more talk maybe?) something about it. Nothing is happening across the ditch. And thats a fact! Its the RBNZ thats panicked about the situation. In the mean time foreign purchases are going through the roof!

        I respect your work a lot H&H, you are way above the pack. But don’t let your negative bias against the RBA cloud your judgement about how effective NZ is. As useless as the RBA is here, and thats saying something (and granted the RBNZ is on the case) – the NZ Government is completely out of touch… and the irony is now, if they did do something, the whole place would crash like a house of cards!!!! Which it will do anyway I guess. Its all a bit too late now.

  4. wasabinatorMEMBER

    NZ: The lands of milk and property.

    The horse already bolted. Game over RBNZ.

    • Nice find @AB.
      Plenty of material to make my blood boil in there (risk, risk, risk… but she’ll be right).

  5. NZ economy is more of a basket case than Australian economy
    And there is nothing miraculous about NZ economy.

    Its economy is a fully financialised mirage built on hubris, debt and greed.

  6. Once again our central bank is stepping in and doing what decades of our govts have refused to do- reign in systemic risk created by our rampant banks and under-taxed property frenzy. Bravo.

  7. what RBNZ is doing is great not because it helps solve the problems but because it shows how impotent central banks are. This will not solve the problem same way all the previous attempts failed.

    The only way to regulate speculative investments is using legislative power, clearly not letting corrupt unelected central bankers regulate their friends and former and/or future colleagues in finance industry.

    Housing bubble problem can be solved in two short minutes by making one paragraph long law that taxes speculative capital gains (penalty rates could be proportional to credit leverage and/or inversely proportional to ownership period, or some other way that makes sure nobody makes profit by trading homes). From that day forward no property bubble would ever happen again.

    we all know this will not happen because real estate is the only economic sector left on our soil, the only way to prop economy up for few years until next elections.

  8. The Fluid Complex

    It seems that NZ is locking out first home buyers in favour of cashed-up investors through implementing tough new loan-to-value ratio requirements.

    Yet more intergenerational theft, wealth being seconded from the young and growing to the old and rich.