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This weeks Latest Property Market Update
I gave a presentation to some people in the property industry in Palmerston North at the end of last month and the issue of LVRs (loan to valuation ratios) came up. The context was not just potential for removal as discussed in the last column, but whether the Reserve Bank might consider just having a rule for Auckland, or easing the constraint for lower priced properties.
The Reserve Bank has in fact already tried a differential for Auckland when they imposed the 30% minimum deposit requirement in Auckland from October 2015. It had little impact in Auckland’s market, but what it did do was encourage an extra shift of investors toward properties in other parts of the country which they could gear themselves into with fewer dollars than the needed 30% in Auckland.
Come July 2016 the Reserve Bank had reached the conclusion that regional differentials could have undesired side effects and they imposed their new 40% requirement for investors regardless of their location around New Zealand. It is very unlikely that their thinking will have changed and going forward it is best to assume that the same rule will apply everywhere.
What about smaller minimum deposits for lower priced properties? Presumably the person asking this had in mind the rule for non-investors whereby since October 2013 a 20% deposit has been required. The fact is 28% of first home buyers already take out a mortgage with less than a 20% deposit and they account for near half the low deposit lending which banks are able to undertake (restricted to less than 10% of all home lending).
Banks in fact give priority to first home buyers over investors. For these young buyers the key problem is one of high prices – prices which clearly the Reserve Bank thinks could start rising again rapidly. In his final speech as Governor Graeme Wheeler said “…and with the underlying drivers of housing demand (population growth, low interest rates) remaining strong and demand outstripping supply, there’s a risk of a housing market resurgence (and a sharp lift in high LVR lending) if LVRs were removed at this time.”
On top of that, for an increasing number of young buyers the main problem is shifting to being able to meet debt servicing requirements. Banks don’t calculate ability to meet obligations on the basis of the rate which someone might lock their mortgage in at, but a rate at least 2% higher which one day will probably be reached when the Reserve Bank eventually tightens monetary policy.
Plus, should the Reserve Bank actually cut LVRs for lower priced houses, that is probably the market more investors would immediately target in expectation of quick capital gains as young buyers queued for stock.
So as noted last column, LVR changes could be quite some time in the future. On other matters, heading into the general election it seems clear that there has been some extra downward pressure on housing market activity around the country. Does this mean that once we get the next government installed the removal of caution will see things bounding ahead again? Probably not with regard to prices but maybe a little bit for turnover.
The recovery in turnover however is unlikely to reverse the downward trend in nationwide sales underway since the first half of 2016. Annual turnover by registered real estate agents peaked in June last year at 94,633 sales. The total is now 79,632. Chances are that number will fall to at least 65,000 but maybe the lows of 55,000 in 2011 and 53,000 in 2009 will be avoided. After all, our economy is strong, net migration inflows are highly likely to remain firm, and there seems little chance of the Reserve Bank hiking interest rates before very late next year at the earliest.
In fact there remains a chance that the RB will cut rates but not because of the domestic economy. Instead, should conditions radically deteriorate on the Korean Peninsula then we could see a generalised cutting of interest rates by central banks worldwide to help cushion economies against the economic shock which a military conflict with potential for nuclear engagement could bring. Hopefully we don’t get remotely close to that situation.
Written by Tony Alexander
(BNZ Chief Economist)