Popping the housing bubble

Action taken this week by the Reserve Bank to try to cool the Auckland housing market has been widely welcomed, although there are still some doubts about the effects of changing lending rules.

Although the central bank still characterises New Zealand's financial system as sound, it believes risks have increased.

Auckland property, the dairy sector and inflated global asset prices, as a result of prolonged easy financial conditions, were all singled out.

But it was the Reserve Bank's response to the Auckland property market concerns which provided the most interest, particularly around its lending rules.

First, a very broad definition for residential property investor lending has been finalised.

If property is not owner-occupied, it will be classified within the new asset class.

Retrospective increases in bank capital requirements against this form of lending are pending, with more details to be released later this month.

Second, the bank introduced regional loan-to-value (LVR) restrictions, something a business audience in Dunedin was told last year was too complicated to contemplate.

Auckland residential property investors will, from October 1, require a deposit of at least 30%.

However, to reflect diverging regional housing market performance, the current LVR so-called speed restrictions for all housing loans outside of Auckland will be lifted from 10% to 15% of new lending, meaning more people with less than a 20% deposit will be eligible for mortgages.

Business leaders in the South have been arguing against having any LVR restrictions outside of Auckland because the ''bubble'' in Auckland is only hurting the regions.

The East Coast of the North Island, the south of the South Island and the West Coast are not being affected by any soaring property prices, yet banks are restricted in their lending to young people wanting to buy their first home.

Family members have reportedly been roped in to provide the extra cash to meet the 20% deposit needed to qualify for a mortgage, if the speed limit has been reached.

Yes, there have been some creative options advertised by mortgage lenders, but first-home buyers still need to meet lending criteria.

And what about Queenstown, which is consistently either first or second on the unaffordability stakes, just in front of or marginally behind Auckland?

Queenstown is seen as a special case because it is a resort town, and because people choose to retire there.

But the people retiring to Queenstown still need groceries, hospitality staff and someone to serve their petrol and retail requirements.

If any of those service industry staff want to buy a first home and settle down in the area, it becomes a battle of attrition.

Having any lending restrictions on young, enterprising workers trying to get into their own affordable home in Queenstown, or close by, does not make sense.

Also, there seems to be some doubt about whether overseas investors will be affected by the new regulations.

Those offshore buyers may not have to use New Zealand banks to fund their purchase, securing their money in their home country before entering the market and paying cash.

October 1 is still some distance away and investors still have time to further push up Auckland house prices before the deadline.

The ANZ identified two other loopholes.

The definition of holiday homes is unclear.

Many owners use them predominantly but also rent them out.

The actual definition is yet to be announced but this is one area where the market may attempt to evade the new restrictions.

Some investors may simply shuffle their cards, increasing their debt-loading on properties under the limit - their own home or an investment property outside of Auckland - to raise the deposit required to purchase a new property in Auckland.

Those tactics may be why the Reserve Bank shied away from regional LVRs previously, but if the new rules succeed in turning around Auckland house price expectations, there may be limited appeal for investors in such a strategy.

The Reserve Bank is clearly hoping so.

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