Reserve Bank Of NZ Gets Tough

July 22, 2016
Iain MacLeod

In what can only be described as ‘long overdue’, the Governor of the Reserve Bank has signalled significant changes to lending criteria to try and pop the Auckland region house bubble.

Although the Governor gave the banks six weeks warning, all four major banks immediately signed on for the new lending criteria. The major changes see investors only allowed to borrow 60% of the value of the second property (one they don’t live in).

The rules apply nationwide and not only to Auckland as the rampant Auckland market spills over to surrounding regions and sees property values in places like Tauranga and Hamilton spike over 20% in the past twelve months.

Signals are also being sent that loan to income ratios will shortly follow. Right now the average house price is about ten times the average Auckland salary. Clearly unsustainable.

The Reserve Bank is being forced to take what is fairly drastic action now as did the Central Bank in Singapore a few years go. I was consulting with a Singaporean Real Estate agent a couple of days ago and she told me these similar rules have caused the market here to slow down dramatically.

The Reserve Bank of NZ is grappling with having to keep interest rates higher than they otherwise would be as they have tried, unsuccessfully, to contain house price inflation. The downside of this is a dollar at a three year high against the US dollar, virtual parity with the Australian and while exporters (like me!) have kept their heads above water there is real downside economic risk in constantly squeezing exporters margins.

The upside of these moves are that the markets are now pricing in two 25 basis point cuts, i.e. 0.5% over the next few months which will bring fixed mortgage rates down to around 3.5% and floating to perhaps 4.5%. Good for the productive economy.

While this all goes on we wait with anticipation for the release of the Auckland Unitary Plan which I am more convinced than ever will confirm a mix of Auckland growing out beyond its current boundaries and a degree of intensification.

I believe the Government is likely to confirm that it is maintaining the status quo in available resident visas over the next two years. A bold call when many are openly calling for a cut back or slow down in migrant numbers.

Wise move by the Government – there is scant evidence permanent migrants (of which there were around 45,000 last year) are fuelling house price inflation. While some will buy homes most are not adding to house price inflation but are victims of it – particularly in Auckland because they cannot afford to buy homes. This house price inflation is largely home grown with a degree of onshore investors buying into the market. I can only offer praise to the Government for standing firm against the calls of those that do not understand the needs of employers in New Zealand and the importance of migration to the strength of the economy.

More houses are being built but the speculation needs to be reined in.

The Reserve Bank is now getting tough and more power to it.

Leave a Reply

There are currently no comments. Why don't you kick things off?