English warns highly indebted home buyers about risks of higher interest rates and lower net migration; says ANZ's tightening of lending criteria suggests market near 'risky level'; doesn't want US, Irish-style slump

By Bernard Hickey

Finance Minister Bill English has warned highly indebted home buyers that a forecast sharp fall in migration at the same time as rising interest rates could put them under pressure.

English pointed to ANZ’s tightening of lending criteria (reported here at Interest on Friday) as a sign that even the nation’s largest bank is being more cautious about a market that could be nearing its peak and was at a ‘risky level.’

English said it was up to the Reserve Bank to signal to banks or to change its regulations to tighten lending if it was concerned about risks to financial stability and he was unaware of any signalling by the Reserve Bank.

“They’ve (the RBNZ) signalled pretty clearly their concern about the link between very rapid house price growth and pressure that might create in the financial system, and in the past they’ve generally acted to deal with that,” English told Interest when asked if the Reserve Bank had asked banks to tighten lending criteria.

The Reserve Bank has begun early discussions with English to add a debt to income mulitple limit to its existing macro-prudential policy toolkit, which has to be agreed with English. Mortgage lending growth accelerated in April to an annual rate of 8.3%, its fastest growth rate since June 2008. Double digit house price inflation has spread over the last year from Auckland to much of the rest of the country as equity-rich Auckland investors and first home buyers pushed out of the more expensive markets have competed prices higher, funded with strong lending growth.

Reserve Bank figures show investor lending in Auckland rose 48% to NZ$1.623 billion in April from February and made up 46% of the lending in Auckland. A pre-emptive slowdown in lending by banks ahead of mooted new lending controls would also be consistent with what happened before the first two rounds of Loan to Value Ratio controls in November 2013 and November 2015 as the Reserve Bank moved to ensure banks stuck to the spirit of the impending changes and avoided a last minute rush of lending before new rules applied.

On Friday, ANZ tightened its lending criteria through mortgage brokers for rental property investors and owner-occupier borrowers by reducing its Loan To Value Ratio limits, and by stopping lending to investors wanting to buy sections and apartments off the plan.

English said he expected banks and borrowers to both take into account the risks that house prices could fall if net migration slumped and interest rates rose.

“I’d expect the financial system to take account of the inherent risk of rapidly rising house prices. Particularly the buyers,” English said.

“The buyers need to pay attention to the fact that interest rates will inevitably rise even if in the next couple of years they can’t see that happening quickly. The debt related to mortgages lasts a long time,” he said.

“Buyers who are really stretching themselves when interest rates are the lowest they’ve been in 50 years just need to be understand the risk of the pressure that might come if the interest rates go up,” he said.

“If ANZ are tightening their criteria, they are making that decision presumably to mitigate risks they see arising in the market. That should tell buyers something that if one of our larger lenders sees risks that mean that they’re tightening up their criteria, then maybe the market is getting to a bit of a risky level.”

Migration could fall to 12,000

Treasury forecast in the Budget that net migration would fall from a peak of 70,700 in June 2016 to 12,000 by June 2019, while at the same time the 90 day bill rate would rise by 1.1% to 3.7%, suggesting a rise in mortgage rates to over 5%.

English said that net migration had probably peaked and interest rates could rise in future.

“If they’re (ANZ) taking measures to restrict lending independent of the regulator, that tells you they probably perceive that some of the lending looks a bit over-stretched and it stands to reason if you’ve got investors with very high levels of debt against the assets and new home buyers are really stretched on their incomes if interest rates rise, which is inevitable, then they could find themselves in two or three years time pretty stretched,” he said.

“The RBNZ has made it pretty clear that it sees risks to the financial system if this process keeps going and it sounds like the ANZ is tightening up a bit. There’s risk for people who are entering the market when it’s been rising rapidly for a while and at very low interest rates,” he said.

“You can see a scenario out in front where migration does drop off, where interest rates start rising and reducing demand and with higher debt, then people could find themselves pretty stretched.”

English said the Government preferred a more stable market and warned that fast-rising markets could also fall quickly.

“We’d prefer it to be a stable market. It’s well understood around the world that housing markets that rise very fast can drop fairly fast. They certainly don’t keep rising forever. In some countries that’s had a fairly big effect. We don’t want to see that here.”

Last week English warned first home buyers about the risks of buying into the Auckland market.

“Right now they do need to be careful about buying at what could be the peak of the market,” he said.