Economic impact of the new Auckland home valuations
The Reserve Bank’s latest six monthly Financial Stability Report (FSR) includes commentary about the stability and efficiency of the New Zealand banking system. While noting that the main sources of risk remain consistent – housing market vulnerabilities, rural lending (dairy) indebtedness, and exposure to offshore funding markets – RBNZ notes that the financial system remains sound and risks have reduced.
But while these comments are important, they are not why the media have been holding their breaths for the latest FSR. Instead expectations were high that some comment would be made regarding potential changes in loan to value ratios applied to home lending.
Why were the LVRs brought into effect?
The first LVR restriction was introduced in October 2013, requiring banks to have a maximum 10% of home lending with less than 20% deposit. In November 2015 a new rule requiring 30% deposits from Auckland investors was introduced with a 5% speed limit. Restrictions to owner-occupiers outside Auckland eased from 10% to 15% for high LVR lending. And effective in practice from mid-July last year, all investors nationwide were required to have at least a 40% deposit for high LVR lending
Since then we have seen a moderation in house price growth. Sales of dwellings in the three months to October were down 21% from a year ago with nationwide prices ahead just 4.5% from 7.7% growth a year earlier. Annual dwelling sales now sit at 75,000 from 95,000 mid-2016.
The annual pace of housing lending growth has slowed to 5.5% from 9.2% a year ago. The proportion of investors with small deposits in particular has fallen – though investors still buy over 40% of dwellings sold in Auckland because many have cash.
What changes has the RBNZ made?
Responding to reduced lending risks and the slowing in the housing market the Reserve Bank have made some changes to LVR settings – consistent with its position that these are temporary measures that would be reviewed and adjusted over time. From January 1 2018, investors will only need a 35% deposit. Plus banks will be able to lend with less than 20% deposit to all others in up to 15% of new home loan lending rather than 10%.
Will these changes reignite the housing markets around New Zealand? No. Fundamentals of strong population growth versus inability to build rapidly enough will see prices still drifting upward eventually in Auckland. In the regions population growth is generally less but supply responses since 2016 have been strong so the fundamentals are slightly less compelling.
But the feeling of FOMO has gone this cycle. This fear of missing out is what is driving seemingly sane people to speculate in Bitcoin currently and it is what drove a lot of people to try and over-extend themselves in the housing market in recent years. The October 2013 LVR introduction stripped out a lot of these FOMO-driven people but the July 2016 40% deposit requirement really stopped that ball rolling.
Will there be more changes to come?
The absence of rising prices on average in Auckland for the moment and slowing price rises elsewhere means few people are likely to try and buy whatever they can come January 1 2018. But we have to remember a key thing regarding the LVRs. They are experimental. The Reserve Bank is learning what levels work in what circumstances. They found 40% hit the sweetspot last year but now it is too much. They will see what 35% does.
Chances are that if they do decide to make another LVR change it will again be at the time of the release of the Financial Stability Report – the next one coming in May 2018. Why? Because ultimately the LVRs are aimed at boosting financial system stability and ability to handle shocks and that is exactly what the FSR assesses.