Bursting the housing bubble

It was no surprise when Reserve Bank governor Graeme Wheeler this week introduced mortgage lending restrictions as a way of cooling what many see as an over-heated housing market.

However, the loan-to-value (LVR) restrictions on new lending are more aggressive than many expected.

From October 1, banks will be required to restrict new residential mortgage lending at LVRs of more than 80% to no more than 10% of the dollar value of their new housing lending.

Market talk was around figures of 12.5% to 15%, so 10% is much tighter than expected. Putting this into context, recent lending in the high LVR category appears to have been above 30% recently.

The action by Mr Wheeler represents a significant tightening in the supply of credit for the housing market.

The Bankers Association is warning people they may be declined for loans, something which may cynically be seen as a method to drive people into banks now, rather than waiting until October 1.

But signs are already there of retail banks reducing the amount of lending they do to first-home buyers with less than 20% equity.

Kiwibank applied logic when it considered the Reserve Bank announcement.

The bank said it would put first-home buyers at the front of the lending queue, ahead of property investors. Secondly, the bank pointed out the ability to service a mortgage was far more important than having equity at the start.

Equity builds up over time and restricting someone from their first home because of an arbitrary rule will not help reduce pressure on a housing market which, in reality, is being driven by two major centres only - Christchurch and Auckland.

Also of concern is the restrictions that may come for small-business owners borrowing against their homes to inject cash into their enterprises. Banks, over the years, have been reluctant to provide business lending to sole operators.

Instead, banks have taken a security over the home of the business owner. Care will need to be taken to ensure the small-business sector of the economy is not restricted by new lending rules.

Whatever happens now, first-home buyers outside the new lending rules, and small-business owners hoping to expand, will need new ways of accessing finance. Already, there are suggestions of lenders finding ways around it. Family help is always an option, but not for everyone.

Mr Wheeler made it clear that without LVR restrictions, interest rates will need to rise. The official cash rate is at 2.5%, and unlikely to change before March next year.

The central bank continues to highlight that issues such as land and housing shortages need to be addressed. Mr Wheeler notes this is the dominant cause of the increase in house prices in Auckland and Christchurch.

Unfortunately, the supply response of more houses will take years, and economists say the Reserve Bank is left with restraining demand for housing and credit to meet its objective of reducing the financial system risk it perceives from current house price momentum.

What irks people not living in either Christchurch or Auckland is being penalised for a problem not evident in most regional centres.

Higher LVR restrictions will obviously affect people living in areas where housing is more affordable and accessible. And when interest rates rise, everyone will be affected, not just those two centres.

It is a difficult position for the central bank and a Government which did take measures to protect Housing New Zealand's welcome home loans and changed some of the rules around KiwiSaver deposits.

(Other measures not captured by the new LVRs are bridging loans, refinancing of existing loans and high LVR loans to existing borrowers who are moving home but not increasing their loan amount.)

Some first-home buyers and investors will need to alter their plans and buyers with little equity will lower or delay their housing expectations.

The Property Investors Federation says this will reduce demand and take some heat out of the market.

Others expect the new LVRs will have little effect. Mr Wheeler says if the measures are not considered effective, they may be removed.

What seems most likely is the central bank will be unable to avoid hiking the OCR early next year, lifting the value of the dollar and putting another type of squeeze on the economy.


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