Reserve Bank attacks housing

The Reserve Bank has published a ‘consultation paper’ that proposes a significant increase in property lending restrictions but is also encouraging banks to act quickly on their ‘proposals’.

This may be related to a predicted further drop in interest rates.

This is just one of a range of attempts to clamp down on escalating property prices.

Reserve Bank consults on new nationwide investor LVR restrictions

The Reserve Bank has today released a consultation paper (PDF 1.2MB) proposing changes to loan-to-value restrictions (LVRs) to further mitigate risks to financial stability arising from the current boom in house prices.

“The banking system is heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength.  The proposed restrictions recognise the higher risks associated with such lending,” Governor Graeme Wheeler said.

Under the proposed new restrictions:

  • No more than 5 percent of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60 percent (i.e. a deposit of less than 40 percent).
  • No more than 10 percent of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80 percent (i.e. a deposit of less than 20 percent).
  • Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

These proposed new restrictions would take effect on 1 September 2016 and simplify the LVR policy by removing the current distinction between lending in Auckland and the rest of the country.

Mr Wheeler said: “The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy.  Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority.

“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country.  A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.

“LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages. This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand.

“We expect banks to observe the spirit of the new restrictions in the lead-up to the new policy taking effect.”

Consultation concludes on 10 August.

Mr Wheeler said that the Bank is progressing its work on potential limits to high debt-to-income ratio lending, which would be a potential complement to LVR restrictions.

“We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential policy to include this instrument.”

Greens want to ‘repurpose’ Kiwibank

James Shaw announced a Green policy to “repurpose Kiwibank and save Kiwis hundreds of millions”:

The Green Party will strengthen Kiwibank so that it can compete with the big four foreign owned banks leading to better interest rates, the Green Party said today.

To achieve better bank interest rates, the Green Party will:

  • Inject a further $100 million of capital in Kiwibank to speed its expansion into commercial banking;
  • Allow Kiwibank to keep more of its profits to help it grow faster; and,
  • Give Kiwibank a clear public purpose to lead the market in passing on interest rate cuts.

“The Government has limited Kiwibank’s ability to scale up and compete, leaving the big foreign banks free to make unnecessarily large profits off Kiwis, rather than pass on recent interest rate cuts to us all,” said Green Party Co-Leader James Shaw.

“New Zealanders could be getting better interest rates no matter who they bank with if Kiwibank was allowed to properly compete with the big four Australian banks.

“Under our plan, a first home buyer in Auckland with a $500,000 mortgage could save $690 per year, meaning they pay off their mortgage earlier.

“Across the entire economy, these mortgage savings alone translate into savings of $312 million per year. That’s a massive saving for NZ Inc.”

New Zealand’s banking sector is amongst the most profitable in the developed world.  Four foreign-owned banks control 87 percent of New Zealand’s banking industry — a situation ratings agency Standard & Poor’s recently described as ‘oligopolistic’.

“Our plan will help Kiwibank lead a change in New Zealand banking, by giving it a clear public purpose that requires it to drive competition to generate better interest rates for New Zealanders,” said Mr Shaw.

“We’ll help Kiwibank to grow faster by injecting $100 million of capital into the bank and let it retain more of its profits.

“Strengthening Kiwibank so it can create competition in the banking sector is the smartest way to ensure all banks pass on the best interest rates to Kiwis.”

Link to more information:

NZ Herald: ‘Beefed up’ Kiwibank would save homeowners big bucks – Greens

“Beefing up” Kiwibank would lead to lower interest rates and could save homeowners hundreds of dollars, Mr Shaw said.

“Under our plan, a first-home buyer in Auckland with a $500,000 mortgage could save $690 a year, meaning they pay off their mortgage earlier.”

Across the entire economy, these mortgage savings alone translate into savings of $312 million a year.

That’s a massive saving for NZ Inc.

But is it realistic? I’m sure the Green numbers will be checked over.

But Labour are sticking to strong arm tactics for now:

Labour leader Andrew Little said he would not rule out legislating to force banks to pass on cuts by the Reserve Bank…

It’s worth keeping in mind that with current support levels any changes to Kiwibank would also require NZ First support.

Last month Winston Peters slammed trading banks but gave no specifics on what he would want to do about them:

Winston Peters has got no sympathy for our trading banks.

The New Zealand First leader said the excuse used by the banks that they’re facing higher international borrowing rates doesn’t wash.

“The disparity between the actual borrowing rate and what they’re charging the borrowers in this country is a disgrace. We’re paying not the lowest interest rates in 50 years but in fact, in comparative terms, the highest”.

That doesn’t make sense. But NZ First voters, many of whom are retired and rely on interest earnings on savings, may not be happy with pushing interest rates down.

Little’s banking ballsup

Andrew Little is getting clobbered from all directions for suggesting he would ‘stiff-arm’ banks to get them to cut interest rates in line with OCR reductions, and if necessary legislate.

Radio NZ: Labour call on bank OCR cuts ‘dumb idea’ – English

Andrew Little says the government should pressure the major banks to reduce their mortgage interest rates, and if he was prime minister he could go as far as legislating to make them do so.

“I would start with pretty serious talking, you might say ‘stiff-arming’, and if they are not responsive to that, I guess you’ve got to look at your options when you are in government.

“You have the power to legislate, but I think you have got to have a pretty serious talk to the banks about expectations.”

Mr Little said if he did have to legislate he would do so reluctantly and with a heavy heart.

Responses have been scathing, with Little getting ridiculed in parliament by John Key.

And Bill English:

“I don’t think anyone in New Zealand wants the leader of the opposition setting interest rates, we tried that back in the 70s and 80s and it ends up with politicians always deciding to try and keep rates in a different place than they should be, so I think it’s a pretty dumb idea.”

Mr English said he was quite surprised by Mr Little’s comments.

“I mean the Labour Party in the past has always been fairly mainstream on economics, but now they are opposing trade, want the government to set interest rates, it’s headed in a fairly different direction, I think they’re just competing with the Greens.”

But even the Greens have declined to back political directives to banks, which is managed by the Reserve Bank with a separation from political interference.

Although there was no competition with the Greens on the matter, as the party’s finance spokesperson, Julie-Anne Genter was somewhat lukewarm on the idea of forcing banks to drop their rates.

Little didn’t say whether he would stiff-arm banks to raise interest rates if the OCR went up.

He has landed a balls up in his finance spokespersons lap, presuming Grant Robertson recognises the foolishness of Little’s remarks.

The only positive for Little is it is not election year.