Higher interest rates not solution to housing bubble

Grant Spencer:

The Reserve Bank says raising interest rates now is not the right policy response to an overheated housing market and it considers restricting low-equity home loans as offering the "greatest potential" to curb demand.

Deputy governor Grant Spencer told the Business NZ Council in Wellington that the "overheated housing market is a real threat to future financial stability" and while a shortage of supply was the root cause, low interest rates spurring demand was underpinning the "rapid escalation in house prices".

While the bubbling property market is leading to increased consumer spending, it is not yet threatening overall inflation, which is sitting at an annual pace of 0.9 percent, and any hike in the record-low official cash rate may put "unwanted" pressure on the currency.

"For these reasons, higher interest rates are not the right policy response at this time," Mr Spencer says.

The bank favours imposing restrictions on the high loan-to-value ratio home lending, which "offers the greatest potential for moderating the current excesses in the housing market".

"LVR restrictions have the most potential to reduce risk both by making bank balance sheets less risky and by dampening housing market pressures through reduced credit supply."

Juggling competeting impacts

In setting monetary policy, the central bank has been juggling competing inflationary impacts of a strong currency, which keeps imported prices down, against the threat of rising house prices fuelling consumer demand and pushing prices higher.

Mr Spencer says the tools were developed to address this type of imbalance, and "the Reserve Bank is therefore seriously considering the use of macro-prudential policy".

Last month Reserve Bank governor Graeme Wheeler and Finance Minister Bill English signed off on granting the regulator new macro-prudential tools, including LVR restrictions, as a means to head off potential asset bubbles.

The bank is consulting with lenders on the technical implementation of LVR restrictions.

Mr Spencer says the central bank does not want to ban low-equity home lending outright, instead preferring a "speed limit approach" where banks would assess which customers would qualify for high LVR mortgages based on their own lending criteria.

Any restrictions on low-equity home loans would only apply to new lending and the central bank would prefer a policy of no exemptions, in contrast to Prime Minister John Key's preference to see first-home buyers carved out.

While the central bank is not mandated for social equity, Mr Spencer says limiting the accessibility of credit in the short-term should make housing affordable over a longer timeframe by taking the steam out of a bubble.

The introduction of LVR restrictions contains risks and needs banks to co-operate for it to be successful, he says.

(BusinessDesk)


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So what he is saying is that cheap money doesn't fuel price appreciation in housing - ie, if the OCR was at 5% we would still have hot market. LOL

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You are right to point out the obvious fallacy in the article - the OCR does matter.

Actually, fixed-term mortgage interest rates are even more important and they are increasing rapidly worldwide in the wake of the US Fed talk about slowing down QE. So the days are probably numbered for Auckland's housing boom.

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The OCR makes no difference, and any efforts by the Reserve Bank to restrict Kiwi's access to cash simply plays into the hands of immigrants, who will be able to buy prime properties even cheaper. The Reserve Bank governor needs to take a proper look at what is happening in central Auckland and Christchurch. The majority of buyers are fresh immigrants and visitors who come loaded with cash - and, yes, mainly Chinese. Until these idiot bureaucrats take a proper look they are just talking nonsense.

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Couldn't agree more.

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Regulate property investors and speculators, not first-home buyers.

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Why pick on those who save and invest some of their money on rental properties, Andrew?
Also, could you please explain what you describe as investors and speculators - what do you see as the differences.

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Regulate foreigners. No Kiwi Passport = No Buy.

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Here is simple idea. Adjust people's expectations and build smaller houses and allow zoning and land supply changes to fit in line with the rest of the world. None of the proposed changes will make a dent in the demand driving prices as more people choose to live in NZ and especially in Auckland.

Comparison of new house sizes across the world:

Country House size (m²)
Australia 214.6
United States 201.5
New Zealand 196.2
Denmark 137.0
Greece 126.4
Belgium 119.0
Netherlands 115.5
France 112.5
Germany 109.2
Luxembourg 104.1
Spain 96.6
Austria 96.0
Ireland 87.7
Finland 87.1
Sweden 83.0
Portugal 82.2
Italy 81.5
United Kingdom 76

source: greenlivingpedia.org

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Mandating smaller houses will not solve the problem as most of the cost of a home is the section price, unless, of course, the minimum size of a freehold section is reduced simultaneously. But will the voting public buy that?

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Obvious outcome of restricting LVRs is to make it less affordable for new home buyers when the fundamental problem is supply. If houses are unsustainably high, why is this not transmitting to residential developers? The short answer is that they are already starved of credit. Only outcome of this policy is a further deterioration in the supply side. Also, please can we stop using the term unaffordable. By defintion they are afffordable as the market is clearing. They may be expensive but that is a whole different story.

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The TV One's Sunday programme discussion on property detailed a 21-year-old international student buying three Auckland properties for $5 million cash ... freehold ... no finance required.

How does speed limiting LVRs capture that?

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Those good people who have, to date, heeded the RB warnings and have stayed out of the housing market are about to be roundly punished for taking in those sound bites... can only happen in NZ! To think people get paid (handsomely) for such ingenuity.

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We should be stoked that 'international ignorants' are spending obscene amount of cash in our country, buying overpriced properties, etc.

If the Chinese would like to spend a ridiculous amount of cash (NZD5 million! argh!) on three Auckland properties, I say 'Jolly good! Please keep the cash coming.'

That's foreign investment. Why would you say no to influx of $$$$ investment?

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It's not investment, it's gouging. They will sit on the properties for a couple of years and sell them, taking the profits back out of the country. In the meantime their elderly relatives come here and are an added burden on taxpayers and health resources. Remind me again how this is a welcome investment?

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Of course. Almost all Auckland properties are freehold. Presuming you mean they were bought with no mortgage the term is unencumbered or mortgage free.

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What the Reserve Bank have to wake up to now is that they say continually "naughty" on all you people for this house price inflation, it is dangerous, and yet the perception is for those who are not home owners, or even investors, is that the bank is all talk, no substance, and that if they do not buy soon then the same house will be $50k-$80k more in price. Put the OCR up 0.25% at the next meeting and send a clear message, and if the lesson is not learnt, do it again, but do it now. 2002 all over again at this rate.

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LVR will have some effect. However, a more focused set of policies would do more to improve affordability and improve living conditions in rentals.
1) overseas buyers or non-resident taxpayers can only purchase a new home (must be lived in or rented out, not left unoccupied )
2) any rental property must pass a WOF before it can be used.
3) allow KiwiSavers to use the remaining balance in equity calculations for LVR even though the $s stay in the KiwiSaver fund.
4) any overseas or non-resident taxpayer buying residential land must build new houses in 12 months or the land is put back on market at the original price and any gain is treated as tax to be paid to the Crown.

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Hard to believe, do RBNZ staffers have any street smarts?
Does RBNZ have anyone on board who actually knows about real estate and the funding options around? Any changes in the LVR will have little effect, if any.

A young couple with a low deposit but good incomes will top up with personal loans or third-party funding, and those people are not the ones creating havoc.

I have a number of Auckland properties, rental return is low once tax is paid (I am not geared) and not the reason for the investment; it is the only place to park funds that beats inflation and the tax man. This is especially why foreigners are active in the market. RBNZ should sit in on Auckland’s auctions for a month or so to get a handle on what is actually going on.

Market interest rates would cause me to reconsider my investment, regulated low interest rates punish the savers of cash in the population and have not fixed anything anywhere in the world. In fact, they make things worse - look at Japan.

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