Reserve Bank 'guaranteed' housing boom will continue over summer, economist says

Wednesday, 11 November 2020

With the housing market booming, the Reserve Bank has decided to reintroduce loan-to-value restrictions in March.

Loan-to-value restrictions look set to return but the Reserve Bank’s signalling of its intentions could provide more fuel to the housing market fire over the summer months, experts say.

In an announcement on Wednesday, the Reserve Bank said that, as of next month, it planned to start consulting on reinstating the loan-to-value restrictions (LVR) on high-risk mortgage lending.

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In May, the Reserve Bank removed the LVRs that were then in place to ensure credit could flow and so they did not have an undue impact on the Covid-19 prompted mortgage deferral scheme.

But with the housing market currently booming, there has been increasing speculation that the Reserve Bank might reintroduce them.

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Economist Tony Alexander says the Reserve Bank should have made a decision on how to reinstate the LVRs and done it right away.

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Those theories were confirmed on Wednesday, with Reserve Bank deputy governor Geoff Bascand saying the bank is observing rapid growth in higher-risk investor lending.

If the LVRs return, they will come into effect from March 1. What shape they might take remains unknown though.

While the development did not come as a surprise to most, some say the fact there will be no changes until next year is a mistake.

Economist Tony Alexander says the Reserve Bank seems to have forgotten the lesson that with monetary policy greater effectiveness comes from shock announcements.

“With today’s call they have basically signalled to anyone buying property that they should get it done before March comes round and the LVRs are reapplied.

“By doing so, they have guaranteed that the boom we have been seeing in the housing market recently will go on throughout the summer.”

Alexander said the Reserve Bank should have made a decision on how to reinstate the LVRs and done it right away.

“Their primary responsibility is financial stability, and we are seeing an increase in low-deposit lending – and more to investors than first home buyers.”

His latest joint survey with the Real Estate Institute shows there has been a slow rise in the number of investors in the market, with a big jump over the last month.

House prices in New Zealand continue to climb.

Of the real estate agents surveyed, 59 per cent saw more investors this month. That is up from 38 per cent in October and 16 per cent in June.

At the same time, Alexander’s latest spending plans survey suggests that first home buyers are stepping back from the market.

“It’s investors who are in the driving seat now,” Alexander said. “And the Reserve Bank has just said if you are an investor looking to buy you should do it now before we put the LVR brakes back on.”

Mortgage adviser, Campbell Hastie, from Go2Guys, agreed that investors were a force in the market again. His clients used to be mainly first home buyers, but now half were investors.

He said that if the LVRs were reintroduced, the Reserve Bank should apply them to people buying a second property, not first home buyers.

“It is tougher for first home buyers to get loans than it is for people purchasing rental properties,” Hastie said.

“The servicing and income tests are far more rigorous for a first home buyer with a 10 per cent deposit and no equity than they are for someone with a 20 per cent deposit and lots of equity.”

For that reason, if the Reserve Bank simply applied LVRs across the board, it would not be fair to first home buyers, particularly in Auckland, Hastie said.

“As someone who invests myself, I think it should be harder for someone to buy a second property than for someone to buy their first.”

Such is the heat in the market at the moment, there are also questions about how much impact reapplying the LVRs will actually have.

Mortgage Supply Company director David Windler said that if the Reserve Bank wanted the LVRs to reign in the booming market it would need to reapply them at the toughest level.

That would mean returning the LVRs to the settings originally introduced in 2016 which required investors to have a 40 per cent deposit for a mortgage.

“If the Reserve Bank takes the middle ground and puts the LVRs back to where they were before they were lifted in response to the Covid-19 crisis, they might not have much effect,” Windler said.

“Right now, we have a moderate credit environment: banks are pretty tight with their lending and many have pre-Covid criteria in place. We are not operating in a high credit environment.

“Despite that, the market is steaming hot at the moment, largely because there is such a shortage of stock while people are looking to property as a safe asset with better returns than other options.”

This situation made it understandable that the Reserve Bank might look to apply measures to calm down the market but it was also why a soft reintroduction of the LVRs might have limited impact, Windler said.

“But the current situation is widening the gap between the ‘haves’ and the ‘have-nots’ and that’s a social concern.

“So if the Reserve Bank does reapply the LVRs, it would be reasonable for them to put a hand brake back on investors and leave first home buyers alone.”