RBNZ: House prices “unsustainable”. Tightens macroprudential

Via the RBNZ this morning:

The Reserve Bank of New Zealand – Te Pūtea Matua – will soon begin consulting on ways to tighten mortgage lending standards, Deputy Governor and General Manager for Financial Stability Geoff Bascand says.

The action follows the signing of an updated Memorandum of Understanding (MoU) on macro-prudential policy with the Minister of Finance.

“The updated MoU adds debt serviceability restrictions to the list of tools available which will enable us to be more targeted in our approach to tackling financial stability risks,” Mr Bascand says.

“We are focussed on ensuring borrowers are resilient to a range of future economic and financial conditions. We are particularly concerned about those who have borrowed in the past 12 months at high LVRs and high DTIs.

“If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage,” Mr Bascand says.

“We’ve already made adjustments to Loan-to-Value Ratio (LVR) restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending.”

In order to prevent this problem from getting worse, we will be consulting on a proposal to further reduce the amount of high LVR lending to owner-occupiers. We propose to restrict the amount of lending banks can do above an LVR of 80 percent to 10 percent of all new loans, down from 20 percent at present. We will begin consulting on this change later this month with a view to introducing it from 1 October 2021.

“We also intend to consult in October on implementing Debt-to-Income (DTI) restrictions and/or interest rate floors in an effort to provide further comfort that borrowing is sustainable. Introducing DTIs will take longer, whereas the banking industry has informed us that interest rate floors could be implemented more quickly.

“Consultation will be focused on operational feasibility and possible calibration of these tools, including their impacts on investors and first home buyers,” Mr Bascand says.

And Governor, Adrian Orr:

House prices are above their sustainable level and the Reserve Bank of New Zealand – Te Pūtea Matua – is now considering tighter lending standards to reduce the risks associated with excessive mortgage borrowing.

It’s our role – as guardian or kaitiaki of the financial system – to limit these risks for the long-term wellbeing of everyone – borrowers, lenders, and the general economy.

One option is to require borrowers to front with a larger share of the purchase price (deposit) to reduce their exposure to mortgage debt. These tools are known as loan-to-value (LVR) restrictions.

Another option – which can be used simultaneously – is to impose rules on banks to ensure they do not lend unless the borrower is able to weather a wide range of possible mortgage interest rates and income shocks. These tools are known as debt-to-income ratios and interest rate floors. These are the tools that we can now operationalise following the signing of a Memorandum of Understanding with the Government.

We have spoken and written a lot about the many drivers of the current high house prices in New Zealand. We acknowledge that one of these reasons are the low interest rates due to our response to the COVID-19 economic shock.

We had to significantly lower the Official Cash Rate (OCR) to best meet our monetary policy mandate of maintaining low and stable inflation, and contributing to maximum sustainable employment.

The pandemic-induced global economic shock created risks of falling prices (deflation), rising unemployment, and unprecedented global financial stress. The worst of these outcomes has been headed-off by successful health management, government-led wage and business funding support, and lower interest rates aimed to boost cash-flows and keep business afloat.

This is why the current level of interest rates are historically low now. This is also why the current level of interest rates is not indicative of where they will be on average through time – or at least over the life of a mortgage.

Economic spending has recovered to above pre-COVID levels, albeit varying significantly across sectors of the economy.  And, while there remains an enormous COVID-19 challenge globally, the economic consequences of the virus are somewhat clearer, and health management is advanced.

The Reserve Bank’s Monetary Policy Committee needs to think about when and how we would return interest rates to more normal levels, which are neither unnecessarily giving the economy a push forward nor holding it back. Our next opportunity to publicly address this issue is the 18 August Monetary Policy Statement.

Our monetary policy tools (especially the OCR) and our financial stability tools need to be mutually supportive. We need to continuously position the OCR to meet our monetary policy goals, and use our financial stability tools to best ensure that borrowers and lenders are financially capable and savvy enough to manage through the interest rate cycles. This is how the Reserve Bank best contributes to the economic wellbeing of all New Zealanders.

We expect banks operating in New Zealand to take heed of our signal to consult on the tightening of lending standards – both LVRs and debt servicing criteria. They must make their lending decisions with the best long-term interests of the borrower in mind. At Te Pūtea Matua, we are also making the decisions with the long-term interests of New Zealand’s economic wellbeing in mind.

Coming to an Australia near you, but only post-pandemic.

Houses and Holes
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  1. New Zealand to Further Limit Mortgages Amid Relentless Housing Boom … Matthew Brockett … Bloomberg

    https://www.bloomberg.com/news/articles/2021-08-02/rbnz-to-further-limit-mortgages-amid-relentless-housing-boom

    ‘Too much risky lending’: Reserve Bank tightens lending rules and develops new restriction … Hamish Rutherford … NZ Herald

    https://www.nzherald.co.nz/business/too-much-risky-lending-reserve-bank-tightens-lending-rules-and-develops-new-restriction/3AT2OWPVNGHNS56BTPEH4CMGGA/

    Reserve Bank prepares to crack down on housing … Tom Pullar Strecker … Stuff NZ

    https://www.stuff.co.nz/business/125948872/reserve-bank-prepares-to-crack-down-on-housing

    Govt signs off on DTI measures, which will be implemented; RBNZ also to tighten LVR rules from October; RBNZ says it ‘hasn’t seen sufficient reduction in risky lending’ … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/property/111579/govt-signs-dti-measures-which-will-be-implemented-rbnz-also-tighten-lvr-rules

  2. Jumping jack flash

    Its no biggie, they just need a bit of COVID stimulus induced CPI to push all the wages up. Then the amounts of debt everyone is eligible for can rise, and house prices won’t be a problem again, until next time.

    Its really very easy!

  3. Over recent years New Zealand’s housing inflation has been more intense and persistent than Australia’s …

    Aussie property values up 13% since start of pandemic … Leith van Onselen … MacroBusiness Australia

    https://www.macrobusiness.com.au/2021/08/aussie-property-values-up-13-since-start-of-pandemic/

    The average value of New Zealand homes is now $922,421, up 5.9% over the last three months … Greg Ninness … Interest Co NZ

    https://www.interest.co.nz/property/111586/average-value-homes-country-now-922421-59-last-three-months

    … Check Fig 1 Australia v New Zealand annualized historical (to early 2017) quarterly housing inflation of the quarterly report of a year ago … to see just how uncompetitive New Zealand is now. …

    Global House Price Index Q1 2020 … Knight Frank

    https://content.knightfrank.com/research/84/documents/en/global-house-price-index-q1-2020-7255.pdf

    Is NZ’s usually occupied household occupancy 2.6 or 2.7 per household, with its current population base of 5.1 million.

    At 2.6 per household this suggests about 1.961 m usually occupied dwelling units … at 2.7 this suggest about 1.888 million usually occupied dwelling units.

    Conservatively … with the latter and CoreLogics average house (or dwelling ? … see above ) price now $922,421, this suggests a total usually occupied dwelling value of $1.741 trillion … some near 5.3 times GDP (about $330 billion). At the 2.6 persons per dwelling figure, this suggests 1.961 million units with a total usually occupied stock value of $1.809 trillion … near 5.5 times GDP … staggering multiples and way ahead of Australia and elsewhere within the developed world.

    Then there is the 2nd home / holiday home / bach / other significant segment of the market. What is the total stock and value of this segment ? And add this segment to the usually occupied.

    Comprehensive comparative research of Australia and New Zealand would be most helpful. … including the current Median Multiples of all the significant urban areas of both countries.

    This will likely highlight the relative affordability of the regional centres of Australia …

    Australia’s soaring property market still rising, but losing momentum: CoreLogic … Kate Burke … Domain Australia

    https://www.domain.com.au/news/australias-soaring-property-market-still-rising-but-losing-momentum-corelogic-1068689/

  4. Bernard Hickey at The Spinoff … extract …

    https://thespinoff.co.nz/politics/03-08-2021/here-are-all-the-levers-the-government-isnt-pulling-to-fix-our-housing-catastrophe/

    https://thespinoff.co.nz/politics/03-08-2021/here-are-all-the-levers-the-government-isnt-pulling-to-fix-our-housing-catastrophe/

    … extract …

    … Not doing enough on supply

    Back in 1935, the first Labour government led by Ardern’s hero, Michael Joseph Savage, borrowed money directly from the Reserve Bank to launch a state house-building and state-backed private house-building programme that was sustained by both flavours of government up until the early 1980s. Governments from 1935 to 1980 regularly built eight to 10 homes per 1,000 head of population, but that slumped to five to seven per 1,000 for almost all of the last 40 years.

    The house-building rate is only now back at eight per 1,000, having plummeted to three in 2009 (worse than the Depression) and is not nearly enough to drive down prices and rents any time soon to affordable levels seen as recently as the late 1990s, particularly given the 1.2m people added to the population over the last 20 years, mostly through migration. I share Shamubeel Eaqub’s view on the scale of the crisis and the lack of urgency. The chart above is from his Sense Partners consultancy.

    Housing crisis: Response should mirror massive post-war effort – economist Shamubeel Eaqub … Tim Brown … Radio New Zealand / reprint New Zealand Herald

    https://www.nzherald.co.nz/business/housing-crisis-response-should-mirror-massive-post-war-effort-economist-shamubeel-eaqub/ONJFPZRZJKFQLJGYMUL44WQGUI/

  5. New Zealand’s housing debacle: How did the fiscal and monetary authorities get it all so wrong ? …

    … Guess who wears the consequences ? …

    ANZ predicts most aggressive interest rate increases since 2004 as economy overheats … Hamish Rutherford … NZ Herald
    … behind paywall …

    https://www.nzherald.co.nz/business/anz-predicts-most-aggressive-interest-rate-increases-since-2004-as-economy-overheats/P5OZMUCROZXMWH37M6TUGN4OOM/

    Housing crisis: Reserve Bank admits consistently getting house price projections wrong … Henry Cooke … Stuff NZ

    https://www.stuff.co.nz/national/politics/300374056/housing-crisis-reserve-bank-admits-consistently-getting-house-price-projections-wrong

    Statistics New Zealand says unemployment dropped in the June quarter to 4.0% from 4.6% in March, ‘underutilisation’ also dropped sharply, seemingly pointing the way for Reserve Bank interest rate increases … David Hargreaves … Interest Co NZ

    https://www.interest.co.nz/news/111616/statistics-new-zealand-says-unemployment-dropped-june-quarter-40-47-march

  6. Australia housing update: Economist Leith van Onselen writes for News com au …

    … expect Australia’s ‘affordability advantage’ with New Zealand to widen further going forward … particularly regional Australia …

    … expect too … the Australian construction industry and governments at all levels to do ‘whatever it takes’ to keep their more efficient / lower cost (in comparison with New Zealand) detached housing construction sector strong …

    Australian house prices to fizzle as property market loses steam … Leith van Onselen … News com au

    https://www.news.com.au/finance/economy/australian-economy/australian-house-prices-to-fizzle-as-property-market-loses-steam/news-story/b23fc9b8c40b61676615c7828e1a4798

    … extracts …

    … The best short-term leading indicator of price growth is the national auction clearance rate, which has fallen sharply from its March peak; albeit remains elevated from a historical perspective.

    The second best leading indicator for property prices is the growth in new mortgage commitments, which have also turned down:

    Looking beyond the immediate horizon, there are several headwinds building that will slow property prices into 2022.

    Later this year, the Australian Prudential Regulatory Authority (APRA) is likely to impose ‘macro-prudential’ curbs on mortgages to cool the market, such as loan-to-value ratio (LVR) restrictions, debt-to-income (DTI) restrictions, increased mortgage buffers, or restrictions on interest-only lending. …

    … Another longer-term headwind for the Australian property market is the rising supply of homes under construction amid plunging population growth.

    The federal government’s Homebuilder stimulus package has driven a huge lift in homes under construction, most of which will hit the market next year. This comes at a time when immigration into Australia is running at century lows, meaning the structural supply of homes will increase sharply (see next chart). … read more via hyperlink above …

    Population is going down while dwelling construction has lifted.Source:Supplied

    … When can we expect the New Zealand authorities to wake up ? …

    Housing crisis: Response should mirror massive post-war effort – economist Shamubeel Eaqub … Tim Brown … NZ Herald

    https://www.nzherald.co.nz/business/housing-crisis-response-should-mirror-massive-post-war-effort-economist-shamubeel-eaqub/ONJFPZRZJKFQLJGYMUL44WQGUI/

    (Above graph from Bernard Hickeys The Spinoff article ‘Here are all the levers the government isn’t pulling to fix our housing catastrophe’. )

    … learning from the Levitt production system ( extensive further information Performance Urban Planning ) … and too .. why the Selwyn District Council adjoining Christchurch to the south, has consistently high ‘consents rates per 1000 population per annum’ … reported each month by Statistics New Zealand …

    Building consents issued: June 2021 … Statistics New Zealand

    https://www.stats.govt.nz/information-releases/building-consents-issued-june-2021

    … Statistics New Zealand commenced reporting the important ‘consents rate per 1000 population per annum’ July 2020 … which incorporated the outstanding historical graph …

    Estimated number of new homes consented per 1,000 residents up in June year (note important historical graph) … June 2020 … Statistics New Zealand

    https://www.stats.govt.nz/news/estimated-number-of-new-homes-consented-per-1000-residents-up-in-june-year