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RBNZ may force lenders to limit borrowings from August - economists

The Reserve Bank, concerned about spiralling house prices causing financial instability, could force lenders to limit borrowings as early as next month, economists say.

Submissions on the Reserve Bank's proposal to restrict bank lending on low-equity loans closed on July 3.

A summary of submissions, along with the central bank's response, is likely to be published ahead of an updated Banking Supervision Handbook slated for release this month.

That would pave the way for changes to be made as early as August, economists say.

The central bank's head of financial stability, deputy governor Grant Spencer, last month said restricting low equity home loans offered the greatest potential to curb demand in an overheated housing market that was a "real threat" to future financial stability.

The bank is reluctant to use higher interest rates to curb the bubbling property market until next year as it is not spilling over into general inflation and a hike risks increasing the kiwi dollar, which the bank already considers over-valued.

"When the head of financial stability says they now see the housing market as a serious threat to financial stability, that doesn't sound like wait-and-see kind of language," Westpac Banking Corp senior markets economist Michael Gordon says. "They seem pretty determined to use it, and soon."

Pent-up demand

House price inflation continues to increase, driven by supply shortages in Auckland and Christchurch, pent-up demand for housing and the lowest mortgage rates since the mid-1960s, the Reserve Bank said at its monetary policy review last month. House price inflation is project to rise modestly over the coming half year before tracking lower again, it said.

Still, the Reserve Bank is concerned the current escalation of house prices is increasing the probability and potential harm of a significant downwards correction, it said. Stronger house price inflation could also spill over into general inflation, it said.

Of five banks surveyed by BusinessDesk, all said the Reserve Bank could use the new loan-to-value ratio tools as early as August.

"They are in a bind where from a financial stability point of view higher interest rates are desirable to get on top of that risk that they see but the inflation outlook just says no, that is not the time," ASB chief economist Nick Tuffley says.

"It does suggest there is a strong likelihood that they will use the LVR tool at some stage in the second half of the year. If all the ducks lined up and the Reserve Bank's concerns were high, August seems about the absolute earliest timing."

The latest submissions may have thrown up some mechanical or technical issues that need to be worked through before banks can implement the changes, economists say.

The central bank has said it would expect lenders to implement changes within two weeks of an announcement.

The Reserve Bank is unlikely to wait until its next financial stability review in November to announce changes, the economists predict.

"It's a long gap between those reports and if they have already made up their minds that housing is a threat to the banking system then why give people a few more months to rack up some high LVR loans before they act," Mr Gordon says.

The big unknown is how hard the Reserve Bank is likely to apply the speed limit, he says. Some 30 percent of new loans are estimated to be 80 percent debt funded currently with about 10 percent of those comprising 90 percent debt.

"It's difficult to gauge what would be a tough restriction versus a conservative one."

Little is also known about the impact on the housing market. "It depends how hard you apply the handbrake and we don't even know what qualifies as hard."

Most economists expect the Reserve Bank to start raising interest rates from their record low 2.5 percent by March, according to Reuters polls. The bank has forecast rates to start rising from June.

"That is quite a period for low interest rates and ongoing population pressures to continue to put upward pressure on house prices," Mr Tuffley says. "The longer they wait, the bigger the risk of the house price overshoot that they are worried about happening."

The one factor that could restrain the central bank from acting would be if the housing market looked like it was starting to cool of its own accord, Mr Gordon says.


Comments and questions

Undoubtedly this July month will surely end up with record sales and prices of Auckland houses....just to avoid any possibility that RBNZ may force all Lenders to limit borrowings from as early as August!

Yes, and all sold to Chinese. Is there anyone in the Reseve Bank with any intelligence? Penalising Kiwis at the expense of foreignors is madness.

The Nats did not bring in a capital gains tax but amended depreciation claims on buildings.
That achieved nothing in terms of harnessing house prices in Auckland.
And as John Key knows,it is pointless having such a tax if you exempt the family home,as that distorts the market in favour of Auckland.
LImiting borrowing is also nonsense,
The army of professionals giving advice to property investors will find ways around it.

The OCR going from 2.5 to even 4% will make no difference to the level of houses being bought and sold and the subsequent increase in lending by banks. It will punish the (probably 5%) of home owners that are overleveraged and increase the costs of the other prudent 95% unneccessarily. Unless 100,000 people all of a sudden leave Auckland we are not going to get a rapid devaluation in prices, we didnt in 07/08 and we wont in late 2015 when they OCR is again 4%.

Low equity loans are the life blood of first home buyers. Its not in the majority of a lot of families to keep them renting for longer.

It would make more sense to reduce access to low equity loans to second home buyers and investment property buyers.

Hard to understand the RBNZ.

All of the above blogs plus the raft of others made on the subject are correct. What is the answer?
1/ Get on top of untaxed property trading – use the sale and purchase data from the industry to determine who are traders.
2/ Exclude or surcharge non-residents from purchasing residential property (of doubtful use as syndicated purchases are common, using a NZ resident to purchase)
3/Let market interest rates prevail.
4/Re set tax treatment of residential investment property, remove all deductibility, tax rental income ( a simple low cost solution)

Force property investors into commercial property or business. The only negative is the impact on long term renters and the country’s largest landlord Housing NZ. A correction or applying a brake to residential property prices cannot be made without a cost – someone has to pay.

Do not stay in Auckland. Move south. Houses a third of the price, jobs and a much better more peaceful community life. No crime or traffic congestion. Get out. Places like Westport, Hokitika, Winton, Cromwell

If you are near rock bottom move to country towns in the South Island. More cheaper houses to buy or rent, walk to all amenities, the doctor, super markets or schools. Places like Lumsden, Tuatapere, Otautau, Te-Anau.