LVR restrictions begin to bite

The RBNZ released its Financial Stability Report on last Wednesday (13th Nov). 

As expected, the focus was squarely on the housing market, and the RBNZ’s new rule forcing banks to have no more than 10% of new mortgage with LVRs over 80%.

After standing firm against the government’s call for an exception for first time buyers, the RBNZ hinted strongly that they are also unlikely to provide an exception for new house builds.

While the RBNZ believe they will have to wait for 3 to 6 month to confidently gauge the impact of the LVR restrictions, there are some early signs of a reduction in new mortgage lending relative to 2012 (Chart 1). 

Source:  RBNZ, REINZ.

In the short-term, mortgage approvals and housing sales should provide the best leading indicator of the impact of the LVR restrictions imposed by the RBNZ.  In the long-term, we believe that affordability will be a key factor restraining NZ house price inflation.

To monitor the state of the NZ housing market, we are watching the following indicators.

Source:  REINZ and Quotable Value NZ

NZ house price inflation has increased, but remains much lower than the mid 2000s (Chart 2).

Source:  REINZ.

However, there is considerable regional dispersion, and Auckland arguably overheating (Chart 3).

Source:  Statistics New Zealand.

One of the drivers of higher house prices is the lack of house building between 2008 and 2012 (Chart 4), creating a shortage of supply. In May the government and Auckland Council announced a plan to enable 39,000 new homes to be built in Auckland over the next three years.

Source:  Statistics New Zealand.

Another factor supporting house prices is a pick-up in housing demand as net migration has turned around since 2012, particularly as kiwis have returned from Australia (Chart 5).

Source:  RBNZ.

While credit growth has picked up, it is still relatively modest compared to the mid 2000s, suggesting this hasn’t yet been a “credit fuelled” housing boom (Chart 6).

Source:  RBNZ.   Based on private reporting by 8 registered banks.

However, the percentage of risky high loan-to-value mortgage (over 80%) has increased, suggesting an increasing exposure of some banks and mortgage borrowers to a housing market downturn (Chart 7).  The RBNZ aims to reduce this to the new 10% speed limit.

Source:  Interest.co.nz. The lowest standard rates available from ANZ, ASB, BNZ, Westpac or Kiwibank.

The RBNZ have also signalled their willingness to increase official interest rates in 2014, which has pushed up longer-term fixed rates (Chart 8), in part helping to take some heat of the housing market.

Source:  ASB. October survey.

Surveys of housing market confidence suggest that sentiment in the housing market is becoming more cautious, especially in Auckland (Chart 9).

Source:  RBNZ, Property IQ, Statistics NZ, Department of Building and Housing.

While LVR may help restrain the housing market in the short-to-medium term, affordability should help restrain the market in the long-term.  House prices to income are still elevated in New Zealand (Chart 10).

Source:  Quotable Value NZ, Statistics New Zealand, and RBNZ calculations.

Debt servicing costs are also more likely to bite on the housing market in a rising interest rate environment (Chart 11).

Source:  Property IQ and RBNZ estimates.

The RBNZ forecast annual house price inflation to moderate to around 3-4% by 2015 (Chart 12).

In conclusion, in the short-term mortgage approvals and housing sales should provide the best reading on the impact of the LVR restrictions.  There are early signs that the LVR restrictions are beginning to bite.  We believe this will continue.  Furthermore, over the long-term we expect housing affordability to provide another restraint on house price inflation.

Christian Hawkesby is a director at Harbour Asset Management