Loan to value ratios

June 20th, 2013 at 3:00 pm by David Farrar

The Herald reports:

Prime Minister John Key was adamant yesterday the and retail banks could find a way to exempt first-home buyers from proposed restrictions on low-deposit home loans.

At his post-Cabinet press conference, Mr Key said he supported the move by the Reserve Bank that would see banks limit how much of its new mortgage lending could be made on high loan-to-value ratios ().

He indicated any measures negotiated would be unacceptable if they penalised first-home buyers at the expense of speculators and property investors.

“Yes I accept absolutely and endorse the view that the banks should be forced to use this as a legitimate tool.

“I don’t think it should be a tool that is used to write high LVR ratios for a bunch of rich people, and lock out a whole lot of first-home buyers.”

I’m not so sure it is as easy as the Reserve Bank or the PM thinks. First let’s look at how big the “problem” is.

lvr

 

This data is from the five major NZ banks.

So the top three lines are all mortgages with LVRs below 80%.  They comprise four fifths of the total mortgages, and this was much the same in 2008.

There has been virtually zero growth in high LVR loans (over 90%) since 2008 despite there being solid growth in the housing mortgage market.

Essentially, of the approximate $185 billion of housing lending in NZ currently around $150 billion worth of it has an LVR of under 80%.

I think both the RBNZ are the Government somewhat over egging the problem and the need for LVRs.

We also have to be careful of the possibilities of unforeseen consequences. Restrictions on how much a bank can loan to home buyer may mean that they seek unsecured funding, rather than secured funding. This actually happened in Sweden, and actually works to decrease financial stability.

The proposed policies work fairly well in housing markets when there is an over-supply. But in NZ the problem is more an under-supply.

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20 Responses to “Loan to value ratios”

  1. Cunningham (844 comments) says:

    I personally think a CGT should be implemented on ALL property transactions. Excluding the first home like the noddies on the left are proposing means it will be a complete waste of time. Yes I own a house BTW but think for the sake of our economy more has to be done. The above will not make much difference.

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  2. insider (1,028 comments) says:

    Wtf ‘s it got to do with the government how much I borrow? If the bank thinks I’m worth the risk then government butt out. They can manage bank liquidity/funding ratios through other means. Next they’ll be telling me what kind of light bulb or shower head I can install…

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  3. rouppe (971 comments) says:

    Back in the 80’s I know people who would get a new credit card and do a cash advance to get some more deposit because that was the only way to get credit

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  4. bhudson (4,740 comments) says:

    @Cunningham,

    I don’t think a CGT on property is worth the policy paper it is printed on.

    – Sellers will seek to recoup it from the buyer through price, so that isn’t going to bring property prices down (it will just penalise buyers more)
    – If the parties can’t agree, that will just reduce the volume of sales. It won’t actually help meet demand for housing
    – If CGT is levied annually, then it will be the renters who end up paying (which will also increase the barrier to entry to home ownership for renters)

    But worst of all, by a very large margin, is the simple fact that if CGT is imposed as promoted by Labour, it will apply to all investments and therefore the claim that it will shift investment away from property is a complete nonsense.

    No one – certainly not Davids Shearer, Parker or Cunliffe – has been able to explain how taxing investments the same will create a disincentive for one of them, but not the other.

    And yet the media allow Labour to repeatedly get away with the claim.

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  5. Kleva Kiwi (289 comments) says:

    So the Racist Hone wants low interest no deposit loans funded by the government for Maori only

    He said:
    “It would be run through Te Puni Korkiri to “cut out banks and their mean-spirited attitude to Maori”.”

    This guy is not only racist, but an idiot. Can he not yet understand how economics works?

    “The issue isn’t about cost; it’s about priorities.”

    No its about you being racist!

    http://www.stuff.co.nz/national/politics/8820466/Mana-wants-low-interest-loans-for-Maori

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  6. Simon (723 comments) says:

    “Essentially, of the approximate $185 billion of housing lending in NZ currently around $150 billion worth of it has an LVR of under 80%.”

    Classic. That is what they said about sub prime just before it blew up the world in 2007.

    The RBNZ crashes interest rates and then floods the banking system with paper. Now it is getting away on them.

    The only thing government needs to do is step away from the mortgage market. It does this by stop printing money, let the market set interest rates and not promise to bail out any banks or deposit holders. Let deposit holders decide which bank it is safe to lend to. It’s called a market. No one in government is smarter than the market.

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  7. GTP (42 comments) says:

    DPF, those figures don’t reflect that the trend is for new lending is much higher. For new Residential Loans, high LVR is closer to 30%, and I think roughly 30% of those are first home buyers.

    ASB is the worst culprit, 70% odd increase in high LVR is the March quarter.

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  8. peterwn (3,271 comments) says:

    In the old days (actually not too along ago), mainstream lenders (including the Government with its 5% mortgages) strictly limited loans to 66% or so of a property value. You got a ‘second mortgage’ at a higher interest rate and limited term to get to 80-90% or so. The usual secondary lenders were solicitors’ clients via solicitors trust accounts (one of the few mechansims that was unregulated) or for public sector employees (who belonged to the likes of PSA, PPTA, NZEI, Police Association, etc) the PSIS (now Cooperative Bank). A key objective was to ‘burn off’ the second mortgage as quickly as possible. Perhaps there is a case to revert to two tier borrowing so the integrity of bank finances are not compromised by by high lending ratios.

    A two tier approach would also discourage home owners ‘topping up’ their lending – they would be reluctant to ‘top up’ a second mortgage at its ‘higher’ rate. It also seems at present that the interest rate does not vary too much between a 66% loan and a 90% loan. This would seem to encourage undesirable ‘top up’ lending.

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  9. Colville (2,268 comments) says:

    peterwn. I agree.

    If mainstream banks were forced to limit 1st mort to 70% and 2nd mort was limited to 20% it would change the way first homebuyers save/repay.

    If you are paying 13% on a 2nd mort you are less likely to tick up a TV and loungesuite on a revolving credit arrangement as your 2nd mort will have a 3 or 5 yr lifespan.

    Also…likes of ASB etc fight for market share by pushing envelope of LVR and ‘gifts’ in the way of $1000 toward lawyers etc.

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  10. hj (7,011 comments) says:

    Gareth Morgan:

    “I’ll have five houses please – it’s a certainty prices will rise, profits are all tax free, gearing available to amplify my gains – oh it’s all too much, why bother with the day job. And the more the merrier, this bubble is so much fun.

    So with immigrants and investors swarming to Auckland from parts of the world where property speculation is rife, the recipe is set for a party. Apparently Asians are 40 per cent of buyers in Auckland and all buying three or more houses.

    What can the Government do, even if it had the spine to intervene?

    The Reserve Bank’s risk-weighting on mortgages and the politicians’ tax loophole are at the heart of the toxicity homebuyers are facing.

    Fix those factors first. Thereafter the issue for the Government is to what extent is it willing to subsidise growth being Auckland-centric?

    By letting the roads choke even more, forcing the residents into shoebox high-density living, Auckland as the nirvana of well-being will soon despoil.

    But the Government is desperate to solve that natural consequence of agglomeration. If it succeeds the urban drift will accelerate and the quality of life in Auckland will be squeezed.”

    http://garethsworld.com/blog/economics/those-with-means-should-buy-multiple-houses/

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  11. noskire (842 comments) says:

    Pardon my ignorance, but how does the government/bank/whomever determine who is actually a legitimate “first-home buyer”? Would this be picked up via a credit check?

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  12. NK (1,243 comments) says:

    Noskire – I presume you’ll have to sign a statutory declaration saying so. No idea what anyone can do if it’s wrong. And of course we know that no one gives wrong information on a loan application….

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  13. gander (91 comments) says:

    @bhudson 3:29 PM

    . . . if CGT is imposed as promoted by Labour, it will apply to all investments and therefore the claim that it will shift investment away from property is a complete nonsense.

    Agreed.

    On the other hand we actually do have a capital gains tax currently, and if it were interpreted sensibly then maybe investors wouldn’t lean so heavily toward property.

    I’ve been warned that if I buy and sell investments (principally shares) too often, IRD may deem me a trader and then all my gains will be taxable. It’s tough to watch a shareholding shoot up and then glide slowly downward because selling it for an unexpected (or unexpectedly quick) gain might result in all one’s capital gains being taxed.

    But I could buy a property which offered no hope of a reasonable return except by an eventual capital gain – and so long as I pretend that I’m buying it for rental income and not for ultimate resale, my ultimate (hoped-for) capital gain will be non-taxable.

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  14. V (719 comments) says:

    Historical evidence shows that home prices were basically stable, until the 1970’s. At this time the monetary system was delinked from gold and there has been a massive expansion in credit, which has flowed through to the housing sector in a big way.
    Falling interest rates from the 80’s basically means people could finance ever bigger loans, until interest rates approach 0%, as they are now doing.

    “Essentially, of the approximate $185 billion of housing lending in NZ currently around $150 billion worth of it has an LVR of under 80%.”

    The problem with this line is on the surface it may look to be true, but what happens when you take away those highly leveraged borrowers? Prices fall, and people lose equity, so someone with a 75% LVR now might only have an 85% LVR. If you have some sort of economic shock triggering a recession that puts people out of work, what was a positive feedback cycle can turn negative.

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  15. SPC (5,619 comments) says:

    As to the worth of these stats …

    If new loans issued at 90% loan to value result in a market where existing property is valued higher – then former 90% loans go to below 80% loan to value, so the total number of loans where the loan to value is 90% does not change.

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  16. PhilBest (5,121 comments) says:

    Why would a CGT solve a house price problem that is due to undersupply? Fix the supply elasticity problems. There is no correlation between housing market stability and CGT’s in the international evidence. Japan’s steep CGT’s did nothing to prevent a calamitous property bubble.

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  17. PhilBest (5,121 comments) says:

    “Home ownership” policy is not that at all unless it addresses the prices at which new homes, or more accurately, the land on which they will be built, will be supplied.

    Otherwise, tinkering with LVR’s and throwing subsidies at first home buyers merely determines the prices at which first home buyers will end up buying, and the level of debt they take on. The same people who would have missed out, miss out anyway – because the prices, and the amount of debt necessary to get in, rise to beyond their reach.

    Of course the “big finance” sector LOVES urban planning that creates a racket in urban land. They get to make a killing on the size of mortgages, especially as the government tinkers with demand-side “home ownership” policy.

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  18. PhilBest (5,121 comments) says:

    Academics are starting to notice at last that decades of rapid suburban development kept urban property markets less cyclically volatile – eg Ed Glaeser’s latest paper, “Nation of Gamblers”.

    The elephant in the room is that the entire western world went crazy for “urban growth containment” and then property markets everywhere went volatile…… Hel-LOOOOOO? No connection here?

    And the property markets didn’t go volatile where there were actually still no urban growth constraints? How much evidence do we need?

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  19. PhilBest (5,121 comments) says:

    Another great bit of evidence is South Korea’s property markets, where growth containment adopted in the 1970’s resulted in a major affordability problem in spite of almost no mortgage credit system at all – Koreans tended to save up for most of the purchase price of a first home. National savings rather than debt, boomed as young people were saving towards a rising target house price.

    “Supply” is what determines the rate of home ownership. “Credit” under inelastic supply conditions merely determines the price of houses and the level of debt necessary for those who DO get to own a home, to take on.

    But under elastic supply conditions, credit does not affect house prices any more than it affects the price of cars and TV’s. Developers competing with each other keep the prices down, just like car and TV makers competing with each other.

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  20. SPC (5,619 comments) says:

    PhilBest, a CGT gives the tax recipient the ability to invest in sorting out housing supply.

    As housing appreciates in value it is not like cars and TV’s, as housing can earn rent it is not a second car or TV. It attracts speculators.

    The in flow of offshore finance is a modern development and places upward pressure on local housing value, especially if there is no CGT and access to the market by foreign buyers.

    LTV is one way to manage house values while the OCR is low because of low growth.

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