Lending rules

February 28th, 2013 at 10:00 am by David Farrar

Tracy Watkins at Stuff reports:

Rules aimed at taking some of the heat out of the housing market and providing greater financial stability could be agreed as early as the middle of the year, Finance Minister Bill English says.

Those rules are likely to include requiring home buyers to have bigger deposits.

Good for landlords as tenants will stay tenants for longer as they save for a deposit!

In a speech to a business audience in Auckland today, English said the would consult over the next few weeks on proposals giving it a greater ability to influence the amount of lending done by banks and other financial institutions.

These might include requiring lenders to:

* Restrict high-loan-to-value ration lending in the housing sector.

* Hold additional capital on their balance sheet as a buffer during an economy wide credit boom.

* Hold additional capital against loans in specific sectors if risks emerge in those sectors

All well motivated, but my concern is unforeseen consequences.

ANZ chief economist Cameron Bagrie said the mid-year target date suggested “there’s been a lot more thought gone into getting monetary policy a few more mates”.

He was not a fan of rules on the loan-to-value ratio of mortgages, saying it was “akin to throwing a rock into a creek.

“You will find the water gets around the rock.”

Indeed.

Bagrie cautioned against action that might restrict the flow of credit, and said the criteria for using the instruments being proposed needed to be very clear.

He described the housing market as “frothy”, and doubted it was heading into bubble territory.

While some action was needed on the demand side if there was a desire to take heat out of the property market, action also needed to be taken on the supply side given the shortage of houses.

Absolutely. The supply side is key.

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32 Responses to “Lending rules”

  1. Flyingkiwi9 (54 comments) says:

    “Good news for landlords”… so we’re going to have a rent price crisis soon?

    Solution is simple: don’t live in Auckland.

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  2. barry (1,317 comments) says:

    What theyre trying to do is to get people to invest in “productive entities” – to force people to invest in these things rather than putting their money into property.

    The reason why people invest in property is pretty obvious:
    1. One altenate is the finance sector – like the ones that have all failed in the last 3 or 4 years. No longer seen as desirable.
    2. Another alternate is the NZX listed companies. Well they have a history of being very badly run – and memories going back to the late 1980’s keep people away from this lot.
    3. The other option are private companies and entities like dairy farms etc. But these organisations are very difficult for small investors to get into – how does one get a $100k investment in a dairy farm or a private company – bloody difficult.

    So what do most people do? they buy into a rental property. They run it themselves and they are responsible for it. Most people feel very happy with this sort of situation.

    Raising the minumum deposit isnt going to change this. Most people would rather leave their money in bank deposits than go down to the lottery that is the NZX.

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  3. In Vino Veritas (138 comments) says:

    No need to go round the rock. What will happen is that many of the bleaters that claim they can’t buy a house (in the area they want) will still not be able to, since they will need a bigger deposit! Painfully obvious I would have thought.

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  4. vibenna (305 comments) says:

    I think changing LVR ratios is fraught with danger. Also, as it is targeted at people with low deposits, it places a disproportionate burden on the poor. It would be a regressive and unfair tax preventing young people and poor people from being home owners. This could have life-long consequences for that group in society.

    Also, while requiring higher deposits will restrict first home buyers, it probably won’t affect buyers in the $1 m plus category, who will likely have 20% to 40% deposits. The result may well be reduced building of affordable homes (as people can’t afford the deposit, even if they can afford the home), and increased demand for high-end homes as banks focus their lending there. So with reduced supply and increased demand at the top end, the market could well sky-rocket!

    Fix the supply side instead, where most of the expenses are due to regulatory restrictions, and local government charges and delays.

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  5. tvb (4,361 comments) says:

    This issue better be a lot wider than some overheating in central Auckland possibly involving 100 sales a year. Prices out of Auckland are just starting to firm. It seems a fairly cautious approach is being taken v

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  6. krazykiwi (9,186 comments) says:

    So ‘taking the heat’ out involves surpressing the basic human need for domestic security?

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  7. peterwn (3,243 comments) says:

    I think this is an utterly dangerous move – it will have unintended consequences all over the place. This seems a first step to nonny-state regulation of borrowing etc from the pre-Rogernomics era. It could fulfil the slogan used to deface National billboards in 2011 “The Rich Deserve More”. It is the ‘rich’ including those worth $1-$2M (not uncommon nowadays) who tend to benefit from these sorts of policies.

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  8. George Patton (348 comments) says:

    Banks will easily sidestep these LVR rules.

    If the govt imposes an 80-90% LVR, then all the banks will do is up the incentives outside of the loan agreement to bring in the business.

    “Oh – so if you sign up an 80% with Usurybank, you qualify for a $20,000 personal loan for furniture and contents, because as a client of Usurybank, you deserve a plasma TV. And have a bit for legal fees and valuation too. Mmm. Come do insurance with us, we’ll capitalise this against your personal loan as well. Your smartphone looks a little old. Have a free one on us.”

    Make no mistake, mortgage brokers will game the system within weeks of any new rules.

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  9. alwyn (416 comments) says:

    David Parker et al has been demanding all these sorts of changes for some time.
    I suspect that the Labour, Green and New Zealand First parties will have a new campaign by the end of the week.
    They will claim that giving the Reserve Bank these powers has been done at the behest of John Key’s multi-millionaire, film-making, Hollywood mates. These people, who in the leftwing diatrribes are the devil incarnate, are no longer able to cheaply buy all New Zealand land and properties because New Zealanders have been able to borrow money for a mortgage.
    According to the left these new policies have been brought in buy order of, and for the benefit of Key’s slum landlord, rack-rental friends.
    No doubt they will be demanding that these terrible policies must be scrapped and that every New Zealander earning under $100,000/annum (or who can produce evidence of Labour, Green or NZF membership) must be granted 100% mortgages, from the State, at 1% interest.
    Willing to bet against it?

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  10. Grendel (996 comments) says:

    yeah, we are the ones who will ‘game’ the system, sure.

    what will happen is that clients will come to us and tell us they want a loan, but only have a 5% deposit. we will then work out a solution that lets the client get what they want; a house.

    the reality is that it will likely cost them more, but if they want the house they will do it. 2nd mortgages, unsecured personal loans. i am sure the product providers will find a way.

    if the client does not want to buy a home with a 5% deposit, they wont. so its not gaming the system, its finding a solution to stupid government enforced rules.

    they dont need to do this, if the banks (whose money it is), dont like the risk in high LVR loans they will stop offering them, just like in 2008. ANZ only went back to over 90% loans late last year.

    High LVR restrictions will be great for my investor clients, but will keep many low income people out of the market completely. good idea national .

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  11. Rick Rowling (812 comments) says:

    I agree that government imposed constraints on the market often lead to really undesirable unintended consequences.

    OTOH could you say that the GFC was an unintended consequence of low/no deposit, easy credit criteria house lending?

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  12. Richard29 (377 comments) says:

    Capital requirements could be a good idea if the legislation is thought through.

    LVR will be a disaster, effectively blocking a large chunk of first home buyers out of the market unless they have rich parents or deal with loan sharks…

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  13. Nigel Kearney (981 comments) says:

    Here’s why property investment is more popular than other forms of investment:

    You don’t have to hire staff and deal with all the hassle and paperwork that goes with that; you seldom need licences, permits, consents or whatever; you don’t have to deal with GST, and paperwork generally is minimal compared to other businesses; you are hardly affected by complex consumer legislation; and so on.

    In short, government has legislated to make other forms of investment unattractive and therefore unpopular. Cut back that legislation and the problem will go away.

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  14. In Vino Veritas (138 comments) says:

    krazykiwi, since when has an owned house given “domestic security”? A huge chunk of Germans for instance, rent. They seem to have domestic security. People in Africa live in mud huts that are “owned” by the tribe, and they have domestic security. Saying that is like the daft poll in the Herald the other day that had people saying it was a human right to be able to own a house. What a load of utter drivel.

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  15. Colville (2,261 comments) says:

    Yeah watch the finance companies spring back up lending $50K – $100K 2nd mortgages at 12%.
    Great for investors with some cash.

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  16. lastmanstanding (1,281 comments) says:

    One cant help but smile at the dumbarse futility of Gumints trying to manipulate the market. Have said this before but back in the 1970s when Lastmanstanding and soon to be Mrs Lastmanstanding bought their first property the rules were First mortgage maximum 65% house valuation.
    So took 2nd mortgage with Friendly Society ( they were big time into 2nd mtges those days)
    Third mortgage from Solicitors contributory mortgage. All the Solictors around town ran contributory mortgage schemes.

    Old saying Where theres a will theres a way and some posters above obviously in mortgage lending business have already set out some of the gaming schemes.

    Best for Gumint to get the hell out of way apart from repealing RMA and regulating Local Bodies charges ( rip offs) and let the buyers and sellers and builders get on with the job.

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  17. Viking2 (11,412 comments) says:

    Ha, just had a bank offer me money thru their finance co. and that’s without all these rules.

    Govt. should learn that people are smarter than them and should get the fuck out of our lives.

    We are not all born equal even if the socialist status seeking pollies think so.

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  18. peterwn (3,243 comments) says:

    IVV – Generally speaking, tenants other than those of HNZ or councils do not have ‘domestic security’ hence the strong desire for home ownership. Various countries (or parts) have tenancy laws which give tenants ‘domestic security’. These include UK and various USA cities and historically included NZ. Some USA cities forbid the conversion of apartment blocks (single landlord) into condominions (unit titles) to try and retain a reasonable portion of rental housing.

    National could very well be shooting itself in the foot if it adopts such a policy since those aspiring to home ownership are more likely than not National voters.

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  19. SPC (5,595 comments) says:

    It is about increasing bank security and diminishing the flow of offshore money via banks into local housing (another reason we should restrict residential ownership to residents).

    A 10% deposit for home ownership is not onerous. Those who cannot save it will not survive a mortgage rate rise in any case.

    The market demand problem is investor leveraging off the property value gains to buy more and more properties. A higher LTV ratio for those who already own property is appropriate – say 20-33%. Maybe adding 2% per annum to the equity so that the property value/inflation rise is not used to leverage borrowing against the investment propoerty.

    Those saying that investors could borrow from elsewhere – water around the rock – well what if LTV included all debt finance not just bank? And to back this up – when a rental investor claimed his mortgage payments as a cost against rent income – he had to demonstrate that the mortgage debt this came from met the required LTV test.

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  20. SPC (5,595 comments) says:

    peterwn, if National do nothing, it will cost them the 2014 election. It is those who aspire to own and yet cannot because house prices keep rising who will swing their votes to Labour if National do not act.

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  21. SPC (5,595 comments) says:

    In Vino Veritas, those who think there is no problem with more people renting – have never considered the cost of
    Accomodation Supplement eligibility when workers retire.

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  22. SPC (5,595 comments) says:

    The banks are awash with money and the government sees no money going into creating jobs, its flowing into increased competititon to getting people to bid up the price of property.

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  23. peterwn (3,243 comments) says:

    SPC – and there will be even more problems if it results in sale of houses from landlords to owner-occupiers in conjunction with a slowdown with house building. The forced out tenants would then find it difficult to rent another property. Commentators give too much thought to ‘excessive’ prices, bubbles, etc, and fail to look at the end to end dynamics of a housing market especially in areas with growing population (especially Auckland). The fundamental point is the cost of a new house (or apartment etc) sets tha market price where there is gradually growing population. If the price of ‘existing’ housing stock is artificially driven down, construction of new houses and apartment conversions (from obsolete office buildings, etc) will slow down. Rents will go up to say 15%+ of house values as the number of potential landlords is reduced to those with spare equity. The fundamental thing is to drive down the cost of new ‘entry level’ housing by effeciencies cutting out ‘gold plating’ at all levels (especially council levies) and any other possible method (eg allow overhead power lines, fibre optic, etc). Cost reductions here will flow right through the market. What could help IMO is a 15% rebate (effectively a GST refund) available for first home purchasers or landlords prepared to stay in the rental market for say 20 years.

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  24. SPC (5,595 comments) says:

    peterwn, that is Labour’s challenge to National – it has a programme to build new housing that can co-exist with policy to constraining house values – including encouraging investors to offload property to home buyers.

    Does National have a response – being reliant on rising house values to encourage new building (and some associated attempt to free up more land for building) is asking those aspiring to own a home to be patient or despair and join the upward demand bidding up prices – hoping mortgage rates remain low.

    The problem with a 15% rebate is that new property buyers are not usually first home buyers.

    A CGT on investment property would encourage some investors to pool capital (sell a rental or two dependeing on equity and their existing home) and build a large new home free of such CGT liability. Such building of high end property frees up existing stock for first home buyers etc. A CGT does lead to new building.

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  25. peterwn (3,243 comments) says:

    SPC – A CGT on investment property is a tax on tenants. While a CGT during a transitional phase will effectively be met by investors, the market will over time factor in CGT and so the tenants effectively pay it – one of the unintended consequences I mentioned before. The only possible benefit of CGT is to encourage investors to keep property longer and I am not so sure about that either. The same with removal of depreciation – tenants in the longer term will meet the cost as landlords seek to compensate for a lesser net return.

    Smart landlords and investors made a killing on Labour’s ‘property speculation tax’ in the early 1970’s – not what Norm Kirk and Bill Rowling had in mind.

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  26. CharlieBrown (1,002 comments) says:

    If they do any changes to lending I hope it is just for Auckland loans as that is where the problem is. Don’t punnish the rest of the country because Auckland can’t get their shit together.

    But I do believe they should look to make other investments more attractive rather than introducing punitive measures to make owning rental properties less attractive. Why not drop tax on other investments? I’m sure alot of people would be content with putting their money into a savings account earning interest with little or no tax paid, especially if they increased the supply of land and reduced compliance costs of building.

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  27. Grendel (996 comments) says:

    SPC, deposit saved has nothing to do with the ability to pay for a loan.

    i have done hundreds and hundreds of mortgages for people and what i have found is that people with 5% deposit loans more often than not just want to get onto the ladder so they dont risk property outstripping their ability to buy.

    if the mortgage is $100 a week more than renting (not unrealistic), and you have a 5% deposit for a 300K house, it will take you 3 years to save the additional 5% to get to 10% (without sucking even more money out of your pocket), in that time the 300K house you liked the look of when you had 5% is now out of your price range due to its rise in value.

    so why cost them more? if they can buy the house at 300K, over the 3 years that they would have had to save 15K more, thier house will have raised in value and they will have made some principal repayments.

    i have plenty of clients who have managed to knock massive amounts off thier loans, that they would not have been able to even get if these stupid LVR restrictions were in place.

    the government need simply get out of the way, if banks and lenders are prepared to carry the risk of 95% (or higher) loans, then thats their problem and they will profit or lose on their own bat.

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  28. SPC (5,595 comments) says:

    peterwn, short term ownership of rentals is supposed to be a sign of speculation not investment – and so there should be a CGT liability now. If a CGT suppresses the rise in value of property, then the future cost of rental property diminishes – thus rents are also suppressed.

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  29. SPC (5,595 comments) says:

    Grendal – it is because people are buying property on 5% deposits, rushing in to get property before it goes up in price, that there is the increase in value (and not just home owners also investors).

    A higher level for investors than for home buyers will make this to their advantage (taking foreign investors out of the equation by placing a residency test would certainly help).

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  30. Viking2 (11,412 comments) says:

    Grendel (746) Says:
    February 28th, 2013 at 6:58 pm
    the government need simply get out of the way, if banks and lenders are prepared to carry the risk of 95% (or higher) loans, then thats their problem and they will profit or lose on their own bat.

    ——————-
    Yep and remove any thought of any Govt. gaurantee, any time. Place the repsonsibility for the bank company directly where it belongs. With the owners.i.e. shareholders.
    That’s how the rest of our companies operate.

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  31. wiseowl (869 comments) says:

    No-one has mentioned the high number of Auckland properties sold to absent (mainly Chinese it seems) owners who just rent and bugger off back to China.
    People should have to reside in this country if buying property.
    How about changing the rules there?

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  32. gazzmaniac (2,307 comments) says:

    wiseowl – you’ll probably find that there are more rental properties owned by ex-pat absentee New Zealanders than there are rental properties owned by Chinese.
    I fail to see how owning land in New Zealand is any different for non residents, whether they are living in Sydney, London, or Beijing. Or Auckland for that matter.

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