Editorial by Selwyn Manning:
THE RESERVE BANK OF NEW ZEALAND has decided to intervene in the over cooked Auckland housing market. But will this move – to apply a loan-to-value-ratio of 30 percent to investors – cool demand to levels that bring it into alignment with the rate of sustainable supply?
On Wednesday, the Reserve Bank Governor Graeme Wheeler announced banks and lenders will be required to apply a loan-to-value ratio to those seeking to finance investment properties in the Auckland housing market. (See video)
What this means in real terms is people and businesses that intend to purchase housing stock in Auckland will need a 30% deposit before a loan can be approved by a bank or lender.
The Reserve Bank also intervened to prevent banks from lending more than 10% of total loans to housing investors.
The restrictions apply only to finance on properties within the Auckland Council territorial boundaries and only to finance and lending sourced from within the New Zealand domestic economy.
The Reserve Bank Governor said: “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.”
He added: “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.”
Major hole in the policy:
The big problem is however that the Reserve Bank is unable to apply LVR restrictions to foreign based banks and lenders, nor, under current Government policy, can it apply restrictions on the purchasing power of offshore investors – who are in-part driving up the prices of Auckland houses far beyond the reach of every day New Zealanders.
This morning, Radio New Zealand reported how:
- Adam Edgar and his family have looked at over 150 houses in the past five months, and until last night, were two weeks away from becoming homeless.
Mr Edgar said his experience of overseas buyers meant he thought the new deposit rates for investors would not work.
“It’s too late… From what I have experienced, it’s simply not going to affect the people who are buying houses out there,” he says.
“They’re coming in here cashed up, they’re not buying from New Zealand banks, so it’s irrelevant.” – (See also RNZ audio.)
Finance Minister Bill English was also questioned on this aspect on Radio New Zealand this morning. It was clear from Mr English’s answers the Government will take a wait and see approach.
The Finance Minsiter was reluctant to commit to collecting data on foreign investment that would determine what impact it is having on Auckland house prices.
As such, it appears the Government is loathed to collect information that may force it to apply restrictions to foreign-based investors, as Australia has done. What other motivation could be preventing it seriously looking at offshore investment and speculation?
Well, Mr English appears unconvinced that such regulations – preventing foreign-based investors from buying residential homes in Australia – are making a difference across the ditch. If it isn’t working in Australia, why would it work here, is the rationale implied.
So the Government is leaving the gate to this element-of-demand wide open and unregulated.
The Reserve Bank’s intervention demonstrates distance between the central bank and the National-led Government’s rudder-less free-market policies.
Weeks ago, the Reserve Bank moved to fill a policy vacuum on housing demand. It warned how the current Government’s hands-off-demand policy was unlikely to alleviate risks to the wider New Zealand economy. In other words the market was out of control and a market-led correction would be disastrous.
In response, the Prime Minister referred to Auckland’s cooked housing market as growing pains of the rockstar economy. The Housing Minister Nick Smith refused to consider the importance of intervention on the demand side of the market. Bill English was busy preparing for next week’s Budget.
This week, the ministers were quick to underscore how the Government’s job will continue to focus on increasing supply, while the Reserve Bank can work on easing demand with the tool-kit it currently has at its disposal. The two wings of Government have rarely been so polarised in their approach and methodologies.
Really, the Government has dressed itself up in a political ideological straight jacket. The Reserve Bank however has, through necessity, taken the pragmatic step to act and intervene.
Without a commitment from the National-led Government – designed to curb the rate of offshore-based investment in the market – the Reserve Bank’s intervention is unlikely to achieve its goal.
NOTE: Listen below to Selwyn Manning and Peter Godfrey discussing the issue on their Across the Ditch programme on Australia’s FiveAA radio