By David Hargreaves
It’s risky, perhaps, to be passing judgement on the effectiveness of the latest round of LVR restrictions before those restrictions have even officially taken effect. But, what the heck, I’ll have a go.
While the, now three rounds, of loan-to-value restrictions have each differed significantly in terms of what the measures contain, they have all had the same October 1 start date. Therefore, it is possible to make some early and meaningful comparisons as to what the initial impact was and is.
In 2013 when LVRs were first introduced by the Reserve Bank, there was a furious build-up of activity in the housing market, with soaring sales volumes, ahead of the October 1 date. Thereafter things went pretty darn quiet, which suggested the LVRs were having an impact. But it is worth stressing again (because the RBNZ always glosses over this one) that by late 2013 it was clear that the Reserve Bank was setting itself to hike interest rates – and this it indeed did with four ill-starred rises during 2014. It’s difficult to measure things in isolation but these rate rises must clearly have had an impact coming on top of the LVR moves.
In 2015 there was again a sharp rise in sales activity ahead of introduction of round 2 of the LVRS. It needs to be pointed out though that in 2014 there had been a marked slowdown in the market ahead of that year’s general election, so the spectacular rise in sales volumes looked all the more spectacular, coming off a subdued base.
Round 3 is different
So, to LVRs round 3. There’s been a couple of differences to note around the introduction of this one. Firstly the explicit announcement of the move came a little earlier, in July, as against August for the previous two. Secondly, the banks actually applied these latest restrictions from pretty much the day they were announced, so we’ve not had the kind of run-up and anticipation that we got for the first two LVR introductions.
What to make then of the August housing figures from the Real Estate Institute of New Zealand?
Well, there certainly hasn’t been the rapid build up of sales that we saw in both 2013 and 2015. However, if we consider that the banks effectively applied the new rules from late July, then we should expect to see the dampening impact of this action coming through.
What we’ve seen is an August market with prices and volumes bubbling along reasonably – but, crucially with very low volumes of stock coming on to the market.
It looks to me like a ‘wait and see’ market. It certainly doesn’t – with those low volumes of houses for sale – look like a market about to turn down. Not with the daffodils in full bloom.
Peak impact already?
I’ll stick my neck out and say that we have just witnessed the peak of the impact of these new LVR measures. If I’m right, what we can expect to see is that a wave of buying activity will sweep into the market along with spring and then ‘up she rises’ again.
It has seemed to me that the RBNZ wasn’t massively optimistic that LVRs3 would do much to slow the market. And I think they were right. The failure of LVRs2 to slow things down to anything like the degree the RBNZ expected caught our central bank out badly. It felt it had to do something, so it grabbed for the LVRs again because this is a macro-prudential tool that it already has Government-sanctioned and ready-to-go. But I suspect it probably felt at best that it might get the market to draw in breath for a minute. And I think that was it in August.
What the Reserve Bank will console itself with though, is that the move will shore up the banks’ position in respect to mortgages held by investors (a 40% deposit on a property means the property can decline in value A LOT before the bank is inconvenienced).
This, on top of the way the original LVR ‘speed limit’ from 2013 hugely reduced (the RBNZ reckoned by about $20 billion) the amount of high (above 80%) LVR lending on the banks’ books, will see the financial sector in a much stronger position to handle any significant housing downturn that may eventuate.
RBNZ happy enough
So, come what may, the RBNZ is likely to be reasonably satisfied with its efforts to promote financial stability. Then of course early next year comes the likely introduction of debt-to-income ratios. And it’s this measure that the RBNZ is now obviously pinning its hopes on to control financial stability risks into the near future.
All in all then, I think everything is in place for another pretty busy and buoyant spring and summer period in the housing market.
The latest household financial statistics release from the RBNZ for the June quarter showed two things: Firstly, household debt (now at 165% of household disposable income) is continuing to rise to hair-raising levels. Secondly, the AFFORDABILITY of that debt mountain is looking pretty good! Courtesy of ever-falling interest rates, loan payments are currently consuming just 9% of disposable income on average. As some means of comparison, that’s exactly the same figure as of December 2000 before the last bull housing market kicked off. At one point in 2009 the figure nearly hit 14%.
More room to borrow
What that tells you is that we’ve plenty of room to keep borrowing yet. That 165% debt to income figure is probably going to look small by this time next year. How high could it go? Well, I suppose the real question is: Do we want to know?
For now all I can see is rising house prices and increasing unaffordability for first home buyers.
As I see it, it’s now pretty much entirely up to the Government as to what, if anything, it wants to do about the situation.