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 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”:
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.