The Reserve Bank has slightly eased its restrictions on Loan to Value Ratios (LVRs), but does not expect this to fire up a housing market that is flattening out in the wake of Auckland’s slump in volumes over the last year.
The bank announced this week that it would lift its ‘speed limit’ on high LVR lending (over 80%) for owner occupiers from 10% of new lending to 15% of new lending. It also eased the deposit requirement for high LVR lending for rental property investors to 35% from 40%. It left its high LVR speed limit for rental property investors at 5% of new lending. But it gave no indication of further easing in restrictions that could be in place for years to come. The slight loosening to apply from January 1 could add potentially an extra $1.1 billion in new lending to owner-occupiers over the next year, but that is relatively small given there was $60.9 billion in total new lending last year and the total mortgage book is worth over $240 billion.
The timidity of the moves disappointed real estate agents and property investors, but the Bank was cautious about further loosening given the risks of another breakout in house prices. Governor Grant Spencer was at pains to portray the slight relaxation as no 'green light' for home buyers and bankers to jump back into a market about to boom again. He also rejected the idea it had been done to stop the market falling further. "We certainly don’t want to give the signal that it is some sort of green light that the housing market is back on,” Spencer said. "The signal is more that our expectation is that the housing market is going to remain flat and is not about to re-surge again, but there is a little bit more room for high LVR loans, and a lot of that would be taken by first home buyers," he said. "It is more a toe in the water signal and comment that this is not major event that is really going to impact the market." Spencer doubted the moves would affect the housing market much. "We don’t own or control the housing market. We have an impact at the margin," he said. "In terms of a risk of a downward correction, we think that is a low probability because of the underlying housing shortage that we think still persists, particularly in Auckland," he said.
A lot of the moderation had come from the investor side of the market, where buying and lending had come off at the same time as a change in sentiment from these types of buyers, he said. "A lot of these policies are affecting the potential return of investors. So in some areas there may be more sales of investor property than purchases. So I think it is very clearly a dampening factor on the investor side, but on the other side (owner occupier) you still have a shortage.” "There are still people coming into the country and not enough houses being built to close that gap. So in that sense I think as long as that fundamental shortage exists I think it is very unlikely you have any real risk of the tanking of the housing market."
Spencer did not give a time frame for relaxing the rest of the LVRs and described the relaxation of the deposit limit for landlords from 40 percent to 35 percent from January 1 as only moderate. Spencer said the Reserve Bank wanted more evidence that annual credit growth (currently 6.4%) was slowing to match household income growth of around 5% and that house prices remained flat.
The Reserve Bank also indicated that the urgency behind its push to have a limit on debt to income (DTI) multiples had further waned upon the arrival of the new Government. Then Finance Minister Steven Joyce postponed the Reserve Bank's moves to include a DTI limit in its macro-prudential tool kit earlier this year. New Finance Minister Grant Robertson is also reluctant to adopt the measure. "We still think a DTI or some debt servicing instrument is appropriate to have in the macro-prudential toolkit, but what we have agreed with the government is to postpone further consideration of DTIs or that type of instrument for the macro-prudential review that Treasury and ourselves will be taking over the next year," Spencer said. "We still think it’s relevant to have in the tool kit. We certainly don’t think it’s relevant to be applying now given the housing market has moderated substantially, but consideration of that has been deferred somewhat.” "I am comfortable with postponing the adoption. We were never in the position of saying we were going to put on DTIs or felt they were necessary to apply in the near term given that the market has been coming off and risk has been reducing in the bank’s balance sheets. But the housing market is cyclical and down the track there will be another housing cycle and debt service instruments may well be appropriate at that time."
Meanwhile, the new Government is pushing ahead with plans to ban foreign buyers of existing homes, to extend the brightline test to five years from two years, and to outlaw negative gearing by landlords. It also tightened Overseas Investment Office rules on foreigners buying farms, reducing the threshold for approval from around 2,000ha for dairy farms and 7,000ha for sheep farms to 5ha – effectively excluding some larger lifestyle blocks from being sold to non-residents.
The Reserve Bank is also expected to leave the Official Cash Rate on hold at 1.75 percent until well into 2019 as inflation remains under control, although observers should watch for the appointment of a new Governor in March, who may be more ‘dovish’ and keep rates on hold for even longer.
- House price inflation was broadly flat in October in the biggest cities. Prices in Auckland and Christchurch were down 1% and 2% respectively from a year ago. Wellington’s annual inflation rate was 9.5% in October and Napier’s was 16.3%, while Hamilton’s annual inflation rate was 2.7% and Tauranga’s was 2.5%.
- The Reserve Bank has forecast an unchanged Official Cash Rate through all of 2017 and all of 2018. It does not see the first hike until late 2019.
- Banks have stopped lifting longer term mortgage rates and now also see the OCR on hold until late 2018 after weak inflation and growth figures. Some are tentatively lowering some special mortgage rates and advertising more after the gaps between their lending growth and deposit growth rates narrowed to give them more funding flexibility.
- The Reserve Bank is unlikely to be able to introduce a DTI limit in 2017 or 2018. It has to do lengthy consultation and it has said it would not use the tool right now even if it had it because of the market’s moderation.
- The new Government plans to ban foreign buying of existing homes from early 2018, extend the bright line test to five years from two years and stop negative gearing by landlords. It is not planning a capital gains tax in the first term.
- The key variables to watch in late 2017/early 2018 are New Zealand’s new governing arrangements, China’s bad debt situation, Europe’s financial and political dramas, global inflation and interest rates, and Donald Trump’s twitter account in that order.
Source: NZFSG/ Bernard Hickey