Yesterday, Prime Minister Bill English announced that he would encourage the Reserve Bank to remove the loan to value ratio (LVR) rules that it put in place to take the heat out of rising house prices. As reported in Newsroom:

Prime Minister Bill English has rediscovered his jawbone and has sent a clear message to the Reserve Bank that he expects it to start thinking about scrapping its restrictions on loan to value ratios, now that house prices across the country are flat or falling. He also said a new limit on debt to income multiples that the bank wanted to introduce was no longer needed.

Speaking to reporters before National’s Tuesday morning caucus meeting, English also said he saw no need for the introduction of debt to income ratios because it was “pretty obvious” that there had been a correction in the Auckland housing market.

The Reserve Bank introduced its first version of Loan to Value Ratio speed limits in October 2013, which included an across-the-board 20 percent deposit requirement. The Government agreed after initial objections, and only on the grounds the restrictions would be temporary.

The Reserve Bank has stopped talking about the measures being temporary and has been consulting on the introduction of a new tool – the debt to income ratio limits – to slow lending to home buyers. This is a potential limit on debt to income multiples (DTI), possibly at around five times income. Reserve Bank Governor Graeme Wheeler repeated last week that he wanted the tool just in case the housing market took off again after the election on September 23.

The initial restrictions slowed house price inflation for a few months before a lack of housing supply and record high migration drove another acceleration through 2014, particularly after the re-election of the National Government dampened speculation about a Capital Gains Tax and foreign buyer restrictions.

The Reserve Bank introduced a second round of restrictions in Auckland in November 2015, which included a 30 percent deposit requirement for investors. The second round slowed the Auckland market for a few more months, before it accelerated again through early 2016. The Reserve Bank then introduced a third round of restrictions in October 2016, which included a nationwide 40 percent deposit requirement for landlords. That has played a major part in a sharp fall in house price inflation in Auckland, where prices are now down around three percent from their September 2016 peak. Price inflation has also slowed elsewhere in the country.

For context, here’s what’s happened to median house prices in Auckland over this time (from interest.co.nz). While there has been a flattening off in prices over the last six months or so, and a slight fall from the peak, prices are still considerably higher than they were four or five years ago.

It is no easy task to arrest house price inflation in a market that has run out of control. The government deserves credit for pulling lots of levers on both the supply side and the demand side. (Even as it’s faced criticism for not pulling them fast enough.) As I’ve pointed out in the past, we’re lucky to have local and central governments that have been willing to act. It’s important to recognise that we’ve made some key supply-side reforms, including a big increase in the number of homes that can be built in Auckland under the Unitary Plan, that are a necessary condition for overcoming our housing deficit.

But signalling that LVR rules will be withdrawn in response to slowing price growth risks unwinding all of this. It is tantamount to pouring gasoline on the housing fire just as it’s starting to die down.

While LVRs aren’t necessarily going to be needed in perpetuity, removing them at this point would be catastrophic for two reasons.

The first is the message that this sends to property investors. At this point, house prices are so high relative to rents that rental properties only earn money as a result of capital gains. As a result, most property investors are more accurately described as property speculators. They are gambling on the prospect that prices will continue to rise, even though further price increases are socially and economically unsustainable.

Proposing to remove LVRs in response to slowing price growth sends a clear signal that the government will intervene to guarantee that property speculation is a one-way winning bet. If that’s the case, why on earth would anybody ever choose to invest money in a business in New Zealand rather than ploughing it into residential property? After all, you can lose money running a business…

The second is the message that this sends to first home buyers, young people, and low-income people. It tells us that current levels of housing unaffordability are the new normal. We can forget about prices returning to where they were two years ago, let alone to the halcyon memory of five years ago. Things may not get any worse – but we can guarantee that they won’t get any better.

Now, I fully understand why it’s painful to actually contemplate a fall in house prices. Some people will lose out as a result. Some of those people will have scrimped and saved to buy a home that was just a bit too expensive in a rapidly rising market. So most politicians – not just Bill English! – shy away from the topic as a result.

But that’s the discussion we need to have if house prices are levelling off and we’re trying to decide whether to throw more fuel on the inflation bonfire. Do we want an economy (and society) where property speculators are protected from all downside risks? Or do we want a society that gives everyone – including the young, including the poor – access to decent and reasonably affordable housing?

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54 comments

    1. Speaking as someone who doesn’t own a home, but would like to some day, I’d prefer them to stay for the time being. Since they were put in place I’ve played by the rules and saved up *just* about enough for a deposit on a typical home. If prices drop back to where they were in 2015, then I’ll be set.

      But if the LVR rules change and prices start rising again, then I’ll be screwed over and probably permanently out of the market. See how that works?

      1. It seems really improbable that prices could increase further simply because Auckland will end up with no teachers and policemen (even journalists!). The market only hit that crazy top from which it is now retreating from because of foreign money.
        A modest control on population growth (turn the faucet down for immigration as Mr Little said) and a ban on foreign owners who are not living in the property would just about solve the risk of greater house prices.

        To be honest much as I would like you to have the same opportunity as I to live in your own home it is the problem of homelessness that concerns me most – these are the people who will not be blogging here as they wake up in cars, garages and motel rooms (and under bridges). This is the issue which will swing the next election or at least it would if only Aucklanders voted.

        1. +1 Bob. The Chinese government also had a massive crackdown on funds flowing offshore during the past year… and house prices have stalled – I wonder why……………………….

        2. Agree. I think we must be near a natural ceiling as prices have become literally unaffordable for a large proportion of the population, which removes a significant chunk of demand. Speculators alone can’t keep the ponzi going, they need panicking first home buyers as well.

          1. Recently the number of sales has decreased, from historic trends as I understand it that is a foreshadowing of falling or leveling of prices. I think we are getting to that ceiling through the various measures and factors. Could be also people holding off either selling or buying until after the election when I think about it. Who would want to buy at such high prices with the risk they will fall soon after?

          2. It is hard to see prices dropping given credit is cheap, there are more people than houses and that doesn’t look like it will change any time soon.

          3. The disconnect between rents and house prices in Auckland suggests that there is more to the current high prices than simple population demand. There is definitely a potential for a fall without a dramatic increase in supply.

        3. As was foretold by the great prophet Mr Douglas Adams, Auckland may very well be doomed to the fate of Golgafrincham by a lack of telephone hygienists – Unless the government manages to address the supply issue.

          I’ve no opinion on brightline tax or LVR, I’ve no training in economics, but I do have eyes and ears connected to a (reasonably) well functioning brain and if we don’t help the low wage earners, the city will rapidly go from the current situation to struggling to provide teachers, cleaners, etc to full on emergency – Like a car teetering on the edge of a cliff, only to be tipped over by a landing buzzard.

          Whilst I’m very uncomfortable with clumsy immigration controls (and the image that they’d present to the world), Labour had an interesting idea with reducing the bottom feeders of the training industry. Certainly better than assigning some random income level to be considered “skilled”.

          I like your property ownership idea, however did you mean single title residential properties rather than whole apartment blocks? The former is fair and reasonable (with caveats), the later would stifle development – Just look at the tall towers being proposed/built in Akl now or the near future. That caveat I mentioned, I know a person who’s been here since the early 80’s. Ran a successful business employing Kiwis in Hawkes Bay, retired to Akl (where the kids were). This person owns an apartment (in which they live) and loves NZ as much as anybody, however they still spend just under 6 months of the year in SE Asia where they have other friends and family. Whilst this person has been a citizen for decades (hence not the kind of person you were discussing), what if they were a PR instead? Would you consider them as having the right to own that property?

          1. If by clumsy you mean our current immigration controls that encourage widespread rorts and corruption such as the recently reported common practice of prospective immigrants paying their employer over $20,000 then I see what you mean.
            If you think the world is noticing again that is true with Filipino newspapers writing about exploitation in the NZs dairy industry and some countries not taking NZ apples because of the slave wages and exploitation of our pickers.
            If you mean the world will notice if we reduced our per capita rate by half to match Australia or by two thirds to match the UK I really don’t think so.

            However a total stop on immigration is impossible and any reduction would take time to flow into the Auckland housing market – although even the threat might dissuade some of the investors. Maybe that is why National are promoting immigration.

          2. @ Bob Atkinson – “If by clumsy you mean our current immigration controls” that too! Migrant workers have been exploited for a very long time in NZ. I knew a person who used to have a lot of enemies (for lack of a better word), because she used to visit the Indian migrants and talk to them about their rights. This was over 15 years ago.

            TBH, I wasn’t thinking about the status quo at the time I commented but rather, was frustrated by the idiotic knee-jerk reaction from Mr Woodhouse. Immigration is a complex matter that many seem to wish to over-simplify. For the sake of clarity, by “immigration” I mean those who wish to settle here, rather than migrant workers – Though the workers are the more complex issue that needs to be addressed.

            RE: Reduction – I’m all for a reduction, provided that fair and reasonable testing is in place to ensure that employers can still access foreign workers *where appropriate*. Example of a business with a legitimate need: http://www.noted.co.nz/currently/politics/top-restaurant-owners-call-out-govt-over-immigration-plans/

            Back on topic (even if only a token gesture) – No plan for Auckland’s housing market is going to address the supply issue very quickly. A nasty volcanic event may rapidly “readjust” the equation, but of course it would also do a lot more than affect desirability and housing affordability.

          3. Changing the salary cap for skilled workers won’t stop that restaurateur from hiring skilled foreign employees. It will just require him to fairly reward them for their skills.

      2. Congratulations Peter, you now have enough to buy a house outright and live both mortgage and rent-free in Taumarunui. Now all you need is a small income to get by, such as an online business or part time job. The rest of the time….well that’s what hobbies are for!

        The valuation of my home is $57,000, and it’s a nice tidy renovated 3 bedroom suburban home, on a quarter-acre section.

        The housing crisis is but a distant memory.

    2. If they have stopped house prices rising (not sure they are the reason really) then they have been beneficial to first home buyers.

      I don’t think having first home buyers taking a mortgage with a 10 % deposit on an expensive house is particularly useful for first home buyers. Sure they might be able to physically afford the deposit, but they are set up to pay mortgage interest for most of the rest of their working lives.

      What first home buyers need are lower prices.

      1. Indeed, first home buyers do need lower prices. But they won’t get them on the open market, as they’re competing against everyone else with more money.

        What would suit first home buyers is a programme of increasing housing supply by building lots more dwellings and offering them as (relatively) affordable homes preferentially to first home buyers.

        Luckily some parties in the upcoming election are offering such a choice. Hint: It’s not the party leading the government now. Think about it.

        1. Agree, although I wouldn’t worry about affordable homes specifically as that is only relative to the current market. I would just build homes that will be in demand in the long term and let the increased supply bring prices down.

          Also I think it is entirely possible for prices to fall significantly without a large scale building programme. While there is no doubt there is a supply issue, I think prices have well overshot this, through panic and speculation and could easily come back if speculators disappear and first home buyers are restricted by costs.

  1. LVR’s were put in place to protect banks not investors nor home owners nor to control the market. That is protect banks from their own incompetence (ref various UK, USA, Irish banks in 2008). Banks have a crazy compulsion to loan money for property purchase; they allow for a small risk factor for owners losing their income but never a risk factor for house prices falling across the board. The current LVR limits are arbitrary whether 40% /20% or changed to say 39%/19% will just give an illusion of controlling a market.

    A reasonable stand alone house costs about $250,000 (plenty of building companies advertising them) but the cost of land, the various council consents and a large but rational profit margin make them about a $million (see Hobsonville).
    Sanity will return when the politicians and their major supporters don’t own multiple properties. When it does my million $ home will be worth about $300,000 (it would be less today if it was in Oamaru) and the owners of those entry level apartments selling for over $700,000 today will be regretting their purchase.

    Who is to blame: the last 18 years of government with no attempt at population planning and a vested interest in keeping home owners happy. I was happy too until my kids grew up and they will never own a home if they stay in Auckland.

    1. I wouldn’t say banks have a completely crazy compulsion to lend money. The interest earned on money lent is their main source of income. The more they lend the more they earn. The problem is they aren’t risking their own money but everybody’s. If there is a collapse it isn’t just the shareholders and employees who lose out, there can be wide scale and devastating economic effects. So the LVR’s are really to protect the economy and society from the banks’ incompetence, or probably more specifically the government which would have little choice but to bail out banks if the proverbial really did hit the fan.

      1. You put the case well. Maybe my ‘crazy compulsion’ is just a bit over the top. But just read about HBOS and the cost to the UK taxpayer and the manager who drove the two combined solid conservative financial organisations into insane lending. He is still getting his very generous pension.

    2. Agree, although one of the reasons our banks have been relatively stable is they are well regulated by the Australian government.

    1. Where do you get that figure from? Certainly suggests a potential conflict of interest. What about politicians from other parties or councils?

    2. This is pretty lazy, a glance at the register shows there are many MPS across the spectrum who own property. Perhaps it’s why any party only gives a shit when in opposition?

      1. That list is pretty convincing to me. Try putting in each party into the search engine in turn and note the difference in results.

  2. What is wrong with having flat house prices for a while? Yes it would be great for there to be large scale falls in house prices for first home buyers, but too big a drop too quickly will hurt those who have purchased recently as the value of the house could drop below their loan value and they will risk losing their home.
    Flat house prices in nominal terms will make it easier to save for a deposit plus as incomes rise it will effectively allow a drop in housing values in real terms without risking large scale mortgagee sales.

    1. flat house prices mean it will take 25 years until houses are affordable again. That why we need prices to go backwards. We can let the small number of people who have bought a first home in the last couple of year hold the whole city to ransom.

      If house prices fall in nominal terms it will make it easier to save a deposit than if prices stay flat.

    2. You could put a safety net under house price drops. Something like a negative Capital Gains Tax – applying it to home owners only.
      I agree that it makes sense to have the government attempt to smooth down rapid changes but there should be no need to promise flat prices.

      Maybe an honest party will announce a target house price to earnings ration (currently over 10) of say 5 and promise they will do everything to hit that target – stamp duty, capital gains tax, subsidies to house builders, free council consents, (whatever you can think of), etc. Then a young person could and would start saving for a known goal.

      I’ve made a million by sitting at home doing nothing – unearned income is a bad thing because it devalues the efforts of workers.

      1. Bob, those sorts of policy measures are worth discussing, but most parties would consider them suicide.
        For example, Labour went to the last election with a straightforward policy of capital gains tax, and were open about what it aimed for, but it didn’t get them far.

        The best we can hope politically for at the moment is a commitment to increase supply at (relatively) affordable prices to bring (some) people who can’t afford a house at the moment into the market.

        Check out which parties are offering such a policy, and consider how you vote in September.

        1. Tbf its unclear if the CGT was the reason or that it was David Cunliffe didn’t even know what the policy was and looked stupid during the debate

          1. Sure, if you have a policy considered brave compared to the established orthodoxy then you have to sell it well.

            But it is notable that AFAIK none of the major parties are proposing a CGT this time around.

          2. I don’t think Labour’s CGT was particularly sensible. It replaced an existing 33 % tax on speculators, with a 15 % tax on all houses not owned by the occupier, so many people selling houses (especially with the brightline test) would have been paying less tax under Labour’s proposal.

        2. Glen: political suicide true but you can read TOP for policies which love them or hate them are designed for discussion not vote buying.
          I suspect the solution to Auckland’s housing disaster can only be significant building now which would require the kind of heavy handed approach that most contributors to this blog (and myself) would normally deplore.

          1. TOP is interesting. I like that Gareth isn’t shying away from provoking discussion, regardless of whether you agree or disagree with their policies. It’s as if Gareth is using the party as a vehicle to get his opinions out, if it results in a seat that would for him appear to be a bonus, not a goal.

            The issue with a heavy handed approach, is that in order to be workable, it needs to be simple. There is an art to simplification that is best practiced by those with competence in the area (to be legislated), not by politicians and their (often ignored) advisers.

            For construction I saw a suggestion on the news by a tradie. The suggestion was that the government subsidises OJT for the first year, as the apprentice is largely dead-weight during that time. Why stop there though? Why not provide subsidised fees for the professions in need? If a person can study to be a builder, on the basis of not owing fees if they pass – How would that influence those near school-leaving age?

          2. … and given that a couple of generations ago, training in many fields was given on the job, and considered a responsibility of the employer. Now employers expect the training to be given before they offer employment, even for low-skill jobs.

          3. @ Heidi – RE: Employers expect a fully trained employee, wanting skilled employees has become an issue, in more ways than one.

            I heard on the radio that some medical scientists were having a very hard time finding employees, because the prospects they see all have university degrees and expect pay commensurate to that. That sounds fair, until you dig deeper. The scientist was saying that unis don’t provide enough “lab time”, so for the first few months, the newbie needs OJT to do basic lab work. The scientist went on to say that he’d prefer that people went to polytech (more lab time) and then were trained upwards on the job.

            So in effect, what you have is a vicious cycle where students think they need to be highly qualified to make up for their lack of experience (what my field would disparagingly call a “paper engineer”), when in reality sometimes this isn’t the case. No university would tell a prospective student to take a cheaper course…

            In most roles I’ve held, we expected employees to have qualifications or experience but seldom both. Practical experience was usually worth more than qualifications. A piece of paper just meant that you were able to pass an exam, not necessarily apply the knowledge.

            Whilst I can understand employers wanting an employee to be “fully fledged”, it’s not good…

  3. Another good article, Peter. This is a change English shouldn’t be making. We need a capital gains tax, and we need it to be applied retrospectively. Plus we need an inheritance tax. The inequality this stupid housing game is creating has negative knock-on effects across society.

    1. Taxing people for having the nerve to die is pretty repugnant, but you can reform death duties to be far less offensive. Worth noting that many places with inheritance taxes have a tax-free threshold.

  4. I suspect Bill English knows it would be unwise to remove LVRs buy is saying this as he knows it is what voters want to hear. He also knows the Reserve Bank is independent and probably won’t follow through but he can be seen to be on the voters side.

  5. Graeme Wheeler has been a disaster as Governor of the Reserve Bank. He has represented the interests of the large banks over the people of NZ every chance he has had. He raised interest rates when there was no reason too. He introduced macro-prudential policies to secure the banks loan books at the cost of pushing young people out of the market. He also pushed our country close to deflation. Without any doubt he has been the worst Governor since monetary policy was delegated to the Bank.

    1. I think protecting banks is definitely in the interests of the people of NZ.

      Also it is high prices pushing young people out of the market, not the Reserve Bank.

      1. +1, getting a mortgage on lower than 20% deposit wasn’t hard. Servicing the best part of half a million dollars of debt is.

      2. Yes because those poor Australian banks were really struggling. Wheeler removed their need to compete at the riskier end, but they still make the same profit. That’s a great deal for the banks, lower risk-same return. Let’s hope they appoint a Governor who puts monetary policy ahead of the interests of the banks- someone more like Brash and Bollard.

        1. @mfwic, I see the point you are making, but what should the reserve bank had done instead?

          They couldn’t simply allow the housing bubble to continue unabated due to the macroeconomic risk that presented and the government were refusing to pull any levers hard enough.

          1. Maybe the Reserve Bank should have stuck to their knitting rather than deciding who could and who couldn’t buy a house. Now that they have become political in their interventions they can expect push back on everything they do, even when they carry out their legitimate function of monetary policy. They can wave goodbye to their independence. Maybe someone can explain to me how using macro policy to cap house prices is going to increase housing supply. It won’t. We actually need high prices so long as there is a shortage of homes and mass immigration otherwise we will never get enough homes.

  6. I would like to see the evidence on the impact on LVRs before I make a judgement on their usefulness. However, as stated above the LVRs are about ensuring the robustness of the banking system and not about lowering house prices per se. Debt to income ratios would probably do a better job of that as it would reduce the number of potential purchasers and lessen demand. However, the two biggest factors that have lead to reduction of house price growth has been Chinese capital controls and a returning to normal interest rates. It is well documented that during low interest periods asset prices go up. Now that the Fed has indicated that it will raise interest rates, possibly this year, and unwind its QE program I think we will see money being put back into more traditional investments such as bonds and term deposits.

    1. “the LVRs are about ensuring the robustness of the banking system” – if that is the case, the 40% investor LVR would imply that there was a reasonable risk of house prices falling by more than 40%?

      1. An owner/occupier will in most circumstances stay in his or her home even if there is negative equity – have to live somewhere. A investor can walk away, if they have structured the investment via a company, leaving the bank with the property as the only collateral. If an event were to occur that caused a lot of investors to face difficulties the bank would need that buffer to ensure capital liquidity as they may be a significant price fall. I think the Basel rules weight the risk different for owner/occupier compare to investment but I would have to check that to make sure.

        1. +1 As Adrian points out the LVRs are really about the safety of our banking system and cooling the housing market is secondary in the eyes of the Reserve Bank. I’m sure if NZ had suffered more in the Global Financial Crisis there would be strong public support for retaining LVRs, introducing DVRs, and adding more years to the brightline test. Bringing NZ into line with countries like the UK where the GFC really hurt.

          I hope that the Reserve Bank has enough autonomy from the legislature to resist political strong arming caused by a perceived vote winning strategy in the silly season before an election.

  7. Good article Peter. I think house prices could easily take off, once the uncertainty of the election is over. Demand from immigration/population growth is high. NZ’s population growth is at record highs -in percentage terms as high as the peak baby boomer years. Supply in Auckland has not ramped as much. It hasn’t exceed what was achieved 12-15 years ago. If housing demand suppression tools like LVR’s were removed then that really would be adding fuel to the fire.

    Australian economist Leith Van Onselen states about NZ that the National government is too late the hero on housing supply and that the Labour party has the better housing policies.
    https://www.macrobusiness.com.au/2017/07/nz-government-late-hero-housing-supply/

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