RBNZ urged to reinstate LVR mortgage restrictions

With New Zealand’s housing market morphing into a new bubble:

The Reserve Bank of New Zealand (RBNZ) is being urged to reinstate loan-to-valuation (LVR) mortgage restrictions that were lifted in May:

In the ASB’s Economic Weekly ASB senior economist Jane Turner said the “RBNZ’s job just got a lot trickier than usual”.

“The RBNZ needs to recognise that the housing market risks have shifted dramatically – no longer are they facing the risk of falling house prices, but that of strongly increasing house prices.

“And by doing nothing, the RBNZ faces the risk of fuelling the fire of a housing market bubble, which, if underpinned by highly leveraged buyers, can increase financial stability risks down the line,” Turner said…

The RBNZ has previously indicated that the LVRs would be lifted for at least 12 months, although last week RBNZ Governor Adrian Orr noted the rising pressures in the housing market in terms of lending and borrowing behaviour and indicated that the central bank was “looking at” bringing back LVRs…

“Alas, economists (including ASB) got it wrong, and the surprisingly resilient economy, plus large falls in mortgage rates, plus relaxing LVR lending restrictions proved a very potent mix for the housing market.

“Strong housing demand across the board (it’s not just investors that are buying), coupled with chronic housing shortages means the housing market is now very tight and house prices have lifted strongly to reflect that.”

Seems like a no-brainer.

Unconventional Economist
Latest posts by Unconventional Economist (see all)

Comments

    • Just weird. I think the initial restriction was 20% of the loan book could be high LVR.
      Its like saying crack is bad so we will allow 20% of people to use it.
      You either cap it or cap LTI instead.

      • kiwikarynMEMBER

        For owner occupiers, the LVR limit was 20%, and banks could only lend below that in less than 20% of new lending. But the LVR limit for investors was 30%, and only 5% of new lending could be less than that. So when you take the brakes off investor lending, of course its going to go mental. But the other thing going on is that everyone is raiding their KiwiSaver (super) accounts for 100% of the house deposit now that there is no requirement for a 20% deposit.

  1. Too late; way too late.
    See that bit on the graph 2012-14? That’s where the line should have been held. It wasn’t, to our authorities shame, and now we are going to have pay the price; one that quite frankly, we can’t afford.

      • With the added advantage of ‘our’ major lenders(banks) are actually your banks! The devastation on a personal level is going to be profound no matter which way we jump now.

    • haimona12MEMBER

      Good point about 2014. One has to wonder whether the RBNZ leadership at the time was influenced in that classic kiwi way by the then government’s preferences regarding the beneficiaries of the wealth transfers from the run up in asset prices. Like the largest lender. The ANZ. Can you remind me who’s the Chair of the ANZ these days? We went to the same high school a year apart, but I can’t recall him.

  2. Sadly the RBNZ has degenerated in to a housing inflation factory …

    Reserve Bank’s role in the overheated housing market … Damien Grant OPINION … Stuff New Zealand

    https://www.stuff.co.nz/opinion/300140693/reserve-banks-role-in-the-overheated-housing-market

    … concluding …

    … The entire system collapsed in 1984.

    Muldoon faced the same problem that Orr does and it is driven by the same hubris. A belief that they know better than the market and that every unintended consequence of a regulatory failure can be cured by more regulation.

    Orr wants to correct house price inflation, which has been caused by his wholesale rate policy, which has been designed to correct for an economic shock. This will cause some other result that he will not like and he will seek to regulate that away in a never-ending cycle that will eventually only benefit the purveyors of wheelbarrows.

    We now know how Muldoon’s policies bankrupted this country and forced us into a radical and painful transformation. We are yet to discover and enjoy the price that we shall pay for Orr’s equally reckless monetary adventures but in time we shall.

    Muldoon ended his career camping a parody of himself in the Rocky Horror Picture Show and earned a sliver of redemption in the process. Maybe the Reserve Bank Governor has a similar finale in his repertoire.
    .
    .
    … Finance commentator Janine Starks opines …

    Why house prices are likely to rise post-election … Janine Starks OPINion … Stuff NZ

    https://www.stuff.co.nz/business/property/300131053/why-house-prices-are-likely-to-rise-postelection

    OPINION: Post-election, what will cause the next round of house price rises in New Zealand? The answer is the behaviour of the Reserve Bank.

    That’s a strong statement, but it’s a view I can’t draw myself away from.

    How can we possibly blame the poor old RB? Surely it depends on the outcome of the election. Political parties are firmly focused on the housing supply problem and affordability. They’ll open up zoning, make changes to the resource management act and hopefully find a way of paying for infrastructure costs in new subdivisions, instead of piling these into land prices. … read more via hyperlink above …

    • … In this years 16th Annual Demographia International Housing Affordability Survey http://www.demographia.com/dhi.pdf ( data September quarter 2019 ) New Zealand’s housing was the most unaffordable in the English speaking world at 7.0 times annual household incomes … with Australia at 5.9 … at the national level…

      … the gap is STILL WIDENING … what will the next Survey (release 25 January 2021 ) show ? …

      … Is the New Zealand government going to press ahead with urgency in getting its recent legislative changes WORKING … or will the flight of young people to Australia resume again ? …

      … Check out the September Update of …

      PERFORMANCE URBAN PLANNING

      http://www.performanceurbanplanning.org/

    • Interesting that the author uses this quip:

      “… seek to regulate that away in a never-ending cycle that will eventually only benefit the purveyors of wheelbarrows.”

      By the end of 2021, expect even more references to the Weimar hyperinflation because that’s the path we are rapidly heading down. Even if policymakers can’t see it (or refuse to acknowledge it).

      • Jumping jack flash

        Yes, but these days we don’t carry our money around in clothes baskets, we carry it around in houses. You can fit much more inside.

        Best of all, if its stored inside the house as debt then it isn’t counted as being “inflation” and therefore its no problem. Amazing!

  3. Lifting the LVR restrictions was a mistake and now people are running into housing thinking it’s the path to riches but for many it’s going to be the road to ruin.

    The more I see of things, the more I agree with the view that at some point we see a burst of inflation and when that happens, leveraged asset prices collapse.

    • Jumping jack flash

      Its only the road to ruin if halfway down the burrow someone suddenly decides to bring back sound judgement and rational thinking. At that instant its all over. Exactly like that emperor and his clothes, or lack thereof.

      Its just annoying. Arguably it was the cause of the GFC. Immediately prior things were just heating up and everyone got scared at the last minute.

      Just let the debt flow and take us to wherever it takes us to. The debt knows what it needs.

  4. Economic recovery will be ‘unpredictable and uneven’ RBA warns as it models 50pc property price fall … Nassim Khadem & Gareth Hutchens … ABC ( Australian Broadcasting Corporation )

    https://www.abc.net.au/news/2020-10-27/rba-warns-coronavirus-economic-recovery-will-be-unpredictable/12819312

    More Australians could go into “negative equity”, where the value of their property falls below the outstanding balance on their mortgage, if the pandemic-led recession leads to a big fall in house prices, according to the Reserve Bank (RBA).

    Key points:

    • The RBA’s assistant governor says Australia’s economic recovery from the COVID-19 recession will be “unpredictable and uneven”
    • Non-performing loans are expected to continue to rise as falling incomes make it hard for households to meet repayments
    • The RBA says the likelihood of a major bank failing is “very low, but there are vulnerabilities”
    .
    .
    U.S examples of commercial property stress …

    Jingle Mail Haunts Commercial Mortgage-Backed Securities as Property Values Get Slashed Below Loan Amounts … Wolf Street

    https://wolfstreet.com/2020/10/26/jingle-mail-begins-to-haunt-commercial-mortgage-backed-securities-as-property-values-get-slashed-below-loan-amounts/

  5. Jumping jack flash

    These guys know which way is up!

    Lower LVR, lower interest rates, kick the can! If you’re going to kick it,. make sure its a good one. Get the debt growth self-sustaining again, without needing 10 years of interest rate cuts to limp it along. That’s no way to run an economy!

    Once the debt starts rocketing upwards, and with it the economy and inflation, everyone needs to relax and just go with it otherwise they’ll find themselves back in 2008, not 2006. (or whenever NZ’s golden age of debt was)