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Reserve Bank to keep LVR limits until late this year, Spencer says

The Reserve Bank won't start lifting restrictions on home loans with small deposits any earlier than late in the year, with the limits cooling demand in the country's housing market, deputy governor Grant Spencer says.

The restrictions have slowed house price inflation by about 2.5 percentage points and strengthened banks' balance sheets by reducing the level of high loan-to-value ratio loans on their books, Spencer said in a speech to the Admirals' Breakfast Club in Auckland.

"Before removing the LVRs, however, we will want to be confident that the housing market is responding to interest rate increases, and that immigration pressures are not causing a resurgence of house price pressures," Spencer said. "At this stage we consider the earliest date for beginning to remove LVRs is likely to be late in the year."

In October, the central bank limited the level of new home loans banks could write with deposits of less than a fifth of a property's value to 10 percent, with some exceptions. At the time, almost a third of new loans banks were making were at the riskier level, and since the limits were imposed the share of high-LVR lending has reduced to just 5.6 percent.

Governor Graeme Wheeler embarked on the programme as a means to slow down accelerating demand in the housing market without having to resort to raising interest rates, which could have pushed up an already elevated currency.

Wheeler has since kicked off a tightening cycle to head off looming inflation pressures, raising the official cash rate twice to 3 percent, and the bank projects the rate will increase to near 5 percent by the end of next year.

Spencer today said the future path of interest rate hikes is still uncertain, largely due to the strength of the kiwi dollar.

"A big uncertainty is the future path of the exchange rate, which has a major bearing on traded goods prices and overall economic activity," Spencer said. "The more downward pressure that the exchange rate exerts on prices and activity, the less pressure will need to be exerted by interest rates."

Housing is the other major uncertainty, though Spencer said the bank anticipates a greater impact from interest rate hikes than the 2003 to 2007 housing boom, with more mortgages currently on floating or short-term fixed rates.

"This means that OCR increases will be felt more immediately by existing as well as new mortgages," he said.

The Reserve Bank is more comfortable about private lenders' balance sheets as a result of the LVR restrictions as it reduces their vulnerability to a slump in house prices.

Still, with about 20 percent of banks' mortgage books in high LVR loans, Spencer said rising interest rates will push up the cost of servicing that debt, meaning some borrowers and lenders could face some stress in the coming two years.


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Comments and questions

By then the most commonly spoken language in Auckland will be Cantonese. When will the Reserve Bank do something FOR kiwis?

Naturally, the Reserve Banks feels pretty good about itself as it has seemingly achieved its goal of taking the heat out of the housing market. Well done RB, However this speech raises some interesting questions (a) first home buyers have been largely forced out of the market - is this a good thing? (b) the RB is slightly contradictory, while saying they are very pleased with the drop off in heat in the market - they are also concerned that supply is still not ramping up - particularly in Auckland. This is true, and maybe they should go and talk to some of the house builders... who have found their business severly impacted by the LVR restrictions plus higher interest rates. The builders can't finance themselves unless they get sales . These sales are happening very slowly. This means the builders aren't buying off the land developers so inevitably the supply chain slows down, I know the LVR restrictions are exempt for new builds, however this relates to design builds (ie the building consent must be in the name of the purchaser not the builder - this doesn't help Fletchers, Universal etc who build the houses then sell them) which is a very small part of the market. Because of this the LVR market intervention will continue to impact supply and thus hold prices up particularly in Auckland....I am not sure this is what the RB is after? (d) there is a lot of talk in the speech about the sucess of the housing accord in Auckland bringing more land into the market .... well without buyers this land won't be developed. The land developers need the pre sales from builders to finance the development, its quite simple really. (e) a side issue - if the reason for the LVR intervention is to protect the financial integrity of our banks - why doesn't the RB also restrict lending to highly leveraged farmers/businesses etc. If we had foot and mouth or a more serious Fonterra scandal would the banks not be very seriously impacted? It seems very strange to me that now the RB seems very keen to tell the banks how to lend that they are only looking at one part of the balance sheet???

Answers (I know) to your questions:
a) first home buyer are not forced out, are just postponed their housing plan

b) the property developer don't have cash -- this is only for these highly leverage developers, what I heard of is that developers gets 30% profit margin in the last two years, so .... this market is unhealthy

e) loans to farms/business are not as high as 90%...

And in the meantime house prices have risen another 10% or more... What planet is the RB on?

many people have wrong impression - high interest rate causes high house price. this is simply wrong. High house price or high inflation cause/lead the rise of interest rate. (interest rate is simply not high enough, and house price does have its momentum)

Why doesnt the government do what everyone wants but they are all too scared to action, and dial back the immigration floodgates a couple of notches

Housing is the other major uncertainty, though Spencer said the bank anticipates a greater impact from interest rate hikes than the 2003 to 2007 housing boom, with more mortgages currently on floating or short-term fixed rates.

"This means that OCR increases will be felt more immediately by existing as well as new mortgages," he said.

With 3 major banks offering 6.25% for 3 years that theory is as good as blown out the window. Should see a lot taking this up and being insulated until 2017 from any OCR rises

Unfortunately this National Government is completely out of touch with what the ordinary NZers wants. They seem to be pandering to the rich, esp Chinese and don't care about the crazy house prices in Auckland..

If they do not want to control house prices by restricting overseas buyers and bringing in a capital gains tax or anything to control this major problem, then we will definitely have a Labour /Greens Government come September.

I voted for National last time but I will be voting for Labour this time solely on the "do nothing" housing policies of National.

Sadly have to agree. If National doesn't start listening then I too will be voting Labour for the first time too. National needs a sharp shock.

Why on earth do you think that bring in a capital gains tax will reduce prices. When have you ever heard of a tax reducing prices? Many other countries with high houses prices have a capital gains tax and the evidence suggests it doesn't make a blind bit of difference.

Maybe not, but National needs a wake up call. They and the RB are no longer exhibiting commonsense.

A capital gains tax is essential. It may not control house prices by itself but in the interest of fairness it should be one of the methods used.

Someone earning say $50,000 dollars a year has to pay 30% of his income in tax and still has to support his family, but a wealthy person on a high income sells one of his many rental houses and makes $200,000 capital gain, providing he bought it as rental, will pay no tax at all .

To me this is obscene!!

Whether its obscene was not the issue I was responding to. The issue was whether it will reduce or contain prices - which you suggest it does. Unfortunately, it will not. So don't bleat when its introduced and prices climb even further.

Of more concern is Labour's variable compulsory savings. If it does work, which is unlikely, it will mean lower interest, so maybe cooling general inflation, but feeding house buyers. However we will never know because if it came to be there is no way of measuring the effect.

Anon (the first one) - so would you have a comprehensive capital gains tax which would involve cases of cash poor retirees paying high capital gains taxes on a house which they've owned for many decades; or would you prefer to exempt the familly home and have a more complicated scheme in which people restructure their affairs accordingly and the scheme itself has little financial benefit due to the high running costs?

All for the sake of being "fair".

No one who I've ever seen advocating a capital gains tax regime has ever answered this question.

And don't forget that the majority of rental property owners (like myself) aren't part of your high income example. What this will do is cause rental price inflation as owners will need to recoup their costs somewhere.