Tag Archives: LVRs

Signs that LVRs may be having an impact

April 2014

The Wall Street Journal reports:

New Zealand house prices fell in April while the number of residential properties sold dropped sharply on the year, adding weight to comments by the central bank’s deputy governor last week that new regulations on bank lending are starting to have an impact.

Data from the Real Estate Institute of New Zealand Monday showed the national median home price fell to 432,250 New Zealand dollars (US$371,735) in April from NZ$440,000 in March. On the year, however, the figure was up from NZ$390,500 in April 2013.

REINZ Chief Executive Helen O’Sullivan said the sharp fall in sales volumes impacted all regions, as well as Auckland and Christchurch–the scene of much of the recent price pressure.

“The number of sales in the sub-$400,000 category continue to fall faster than the market overall, suggesting that the LVR (loan to value) restrictions are continuing to have an impact on buyer intentions at the lower price points. The lift in the Official Cash Rate by 0.5% over the past two months is likely to have also had an effect,” Ms. O’Sullivan said.

I have noted before that it seems the Canterbury market is currently “catching its breath”. In Christchurch, despite a drop in sales volumes (487 in April cf. 608 in March), the city-wide median of $412,500 is only 1.3% on a month ago – and up an impressive 10% on last year. For sellers – the market is still in your favour, and with interest rates set to only increase this year, it may be better to act sooner rather than later!

Reserve Bank exempts new builds from LVR restrictions

House ConstructionIn what some may consider an about-face, the Reserve Bank has announced that it will be exempting new builds from its new lending restrictions. The Press reports:

New builds will be exempted from new lending restrictions, the Reserve Bank has announced.

It comes after the building industry raised concerns the lending restrictions would affect the number of new houses being built, affecting Government efforts to increase the supply of new homes to help curb house price inflation.

The Registered Master Builders Federation had claimed the central bank policy could jeopardise the construction of up to 5000 new homes a year and they were seeing an increased number of planned new builds cancelled as a result.

Reserve Bank Deputy Governor Grant Spencer said they had decided on the exemption following consultation with the industry.

“While high LVR construction lending is only around 1 per cent of total residential lending, it finances around 12 per cent of residential building activity.

“This exemption will help to support the supply of new housing and, in doing so, reduce some of the pressure arising from excess demand in the New Zealand housing market,” he said.

It did seem that an exemption for new builds would be inevitable. Further, it is a good move for housing affordability. The exemption now creates an incentive for first-home buyers who are short of a 20 per cent deposit to embark upon a new build, which will in turn create an increase in housing supply.

A recent report entitled, Priced Out: How New Zealand Lost its Housing Affordability by the New Zealand Initiative notes that despite a richer and larger population, our country’s rates of building since the 1980s have not reached the levels of the 1960s and 70s. As a result, our new house building is lagging with a shortfall of at least 10,000 new houses annually – a shortfall that is continuing to grow. Here’s hoping that this exemption will go some way in mitigating that shortfall – but we still have a long way to go yet!

Sales volumes ease nationally, Canterbury growth continues

Infographic

 

The New Zealand Herald reports a rise in median prices, but a slight dip in the number of sales:

Reserve Bank home-loan limits slowed house sales last month, but prices are still on the rise.

The seasonally adjusted number of house sales in October fell by 4.1 per cent compared with the same month last year, Real Estate Institute of New Zealand (REINZ) figures released today showed.

Unadjusted sales were up 2.1 per cent last month compared with a year ago and up 0.9 per cent compared with September, the institute said.

The Reserve Bank imposed loan-to-value ratio (LVR) restrictions early last month in an effort to cool the over-heated housing market.

Most first-time home buyers now require a 20 per cent deposit to qualify for a mortgage.

While the lending speed bumps had slowed the volume of houses sold, prices were still rising, REINZ said.

The national median price hit a new high last month of $407,525.

The median house price for October was 1.9 per cent above the previous record, the data showed.

Prices were 7.2 per cent higher than in October 2012.

Auckland, Canterbury-Westland and Waikato-Bay of Plenty reached median highs last month.

REINZ chief executive Helen O’Sullivan said sales volumes typically changed quicker than prices.

The full effect of the LVR restrictions on median house prices could take a few months to flow through as borrowers with pre-approved loans bought a house, she said.

It is still early days to gauge whether the Reserve Bank’s LVR restrictions will have a marked effect on the market, although many in the industry have reported a decline in open home attendance for entry-level properties. My preference is to consider a broader base (at least 3-6 months) of statistics to get a much more accurate picture of emerging trends in the marketplace. The tendency of the media to draw conclusions on the basis of one month’s stats is often not helpful in bringing reassurance and stability to any market.

As per last week’s comment, the buying public are enjoying a little more choice and a little less intensity, and maybe that is not such a bad thing – supply and demand has a significant balancing effect in any marketplace.

A dissenting view on LVR restrictions

Reserve Bank governor Graeme Wheeler has indicated that he wants LVR restrictions as a way to shore up stability and take the heat out of the housing market.

Reserve Bank governor Graeme Wheeler has indicated that he wants LVR restrictions as a way to shore up stability and take the heat out of the housing market.

A guest post by my son, Caleb:

The proposed move by the Reserve Bank to curb low-deposit lending has received a fair amount of attention in the national media. In previous speeches, Prime Minister John Key has called for an exemption for first-home buyers. However, as Brian Fallow states, because first-home buyers represent about 30 per cent of new mortgage lending, with probably a significant chunk of that being on deposits of less than 20 per cent of the value of the property, such an exemption would undermine the effectiveness of the policy. Fallow continues:

… in a speech to Local Government New Zealand’s conference yesterday Key contented himself with saying that “first-home buyers are a priority for the Government”.

He moved swiftly on to acknowledge that for the Reserve Bank its plans to regulate high loan-to-value-ratio (LVR) lending are primarily about protecting the stability of the financial system and averting the consequences, apparent in recent years in several Northern Hemisphere countries, of a property bubble bursting.

Now I can understand part of the rationale for the policy embarked upon by the Reserve Bank. It’s undesirable for banks to be making high-risk, low-deposit loans to home buyers where there it there is a risk that a downturn in the housing market could result in a number of people being saddled with debts that far exceed the market value of their properties.

It is also an attempt by the Reserve Bank to an extent deflate the housing bubbles that are becoming increasingly apparent in Auckland and Christchurch. But I don’t think trying to dampen demand is the right way to go about the problem. What is needed is wide-ranging supply-side reform of the housing market. Metropolitan limits need to be extended, intensification allowed for in certain areas, and brownfield development opened up. Local and central governments must also examine options surrounding the granting of building consents, and bringing down the costs of construction. At the end of the day, this country needs more houses for its residents. An increase in the supply of homes will bring prices down in the long-run and lessen the need for high risk, low-deposit loans.

We must also ask whether low-deposit borrowing is really a significant problem that needs addressing. David Farrar at Kiwiblog provides some useful analysis of the data from the five major banks:

Farrar Graph

Farrar provides some analysis of the data above:

So the top three lines are all mortgages with LVRs below 80%.  They comprise four fifths of the total mortgages, and this was much the same in 2008.

There has been virtually zero growth in high LVR loans (over 90%) since 2008 despite there being solid growth in the housing mortgage market.

Essentially, of the approximate $185 billion of housing lending in NZ currently around $150 billion worth of it has an LVR of under 80%.

I think both the RBNZ are the Government somewhat over egging the problem and the need for LVRs.

We also have to be careful of the possibilities of unforeseen consequences. Restrictions on how much a bank can loan to home buyer may mean that they seek unsecured funding, rather than secured funding. This actually happened in Sweden, and actually works to decrease financial stability.

My father commented in his latest blog post:

Call me old school, conservative or irrelevant but I fully support the reining in of “high risk/low equity” lending. What was wrong with the old days when a minimum deposit of 20% was required? And yes we worked, scraped and saved to get it but somehow we used to do it.

My response is that we are now in a different age. This proposed policy is not merely a return to the “old days”. Yes, while back then 20 per cent deposits were the norm, housing was also considerably cheaper not only in nominal terms, but also relative to the median household income. Twenty per cent deposits aren’t so bad if the price of your property is relatively affordable. This graph from a paper presented at the Centre for Housing Research Aotearoa New Zealand displays how much property has become unaffordable since the “old days”:

RBNZ Graph

While the ratio has eased off since the housing boom of the mid-2000s, we are now seeing it move upwards yet again, largely driven by the Auckland and Christchurch markets. The New Zealand Herald also provides a handy infographic with the latest data.

The prospect of owning one’s own home is becoming ever more elusive for young New Zealanders. It’s my view that the proposed changes to LVRs by the Reserve Bank is a blunt instrument that seeks to correct market distortions primarily in Auckland and Christchurch, but will restrict access to credit for all home buyers, and will result in the door being firmly closed to those who might have otherwise aspired to getting on the property ladder. Clearly the Reserve Bank is using this policy to attempt to take some heat out of the housing market without raising interest rates, which would otherwise negatively impact exporters with an appreciating dollar. Should this policy be implemented – and it’s looking increasingly likely that it will be the case – it will certainly be interesting to see whether it has its intended effect.

Caleb has works with Griff as a marketing and administration assistant. He has recently completed his LLB/BA (Political Science) at Canterbury University.