INVESTOR EDUCATION – Nationwide LVR Restrictions
Yesterday the RBNZ released a consultation paper proposing changes to loan-to-value restrictions (LVRs)
and also discussed the possibilities of introducing restrictions on the debt-to-income (DTI) lending ratio for home buyers over the coming months. Despite a number of attempts by both the Reserve Bank and the government to cool the red hot Auckland housing market, the trend has to spread to other parts of the country and the Reserve Bank are now concerned about the financial stability of the economy arising from the current boom in house prices. Accordingly, the Bank feels much more decisive action needs to be taken now in order to avoid a full blown bubble collapse.
Tighter Credit Restrictions to Cool Property Bubble
The Reserve Bank has released a consultation paper 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.
The key changes proposed regarding the LVR rules are:
- Applying a nationwide speed limit for all investor lending, permitting no more than 5% of lending at an LVR greater than 60% (from an LVR of 70% previously confined to the Auckland region). Essentially stopping lending to home buyers that don’t have a 40% deposit.
- Applying a nationwide speed limit for all owner-occupier lending, permitting
no more than 10% of commitments with an LVR of greater than 80% (from an
LVR of 80% previously confined to the Auckland region). So owner occupiers
now require 20% deposit nation wide - All LVR rules that differentiate between lending in Auckland and rest of New
Zealand have been removed. - The new rules are proposed to take effect on 1 September 2016.
- The RBNZ indicated that it will continue to explore additional macro-prudential
measures, including DTI ratios and additional capital overlays. These still
appear to be some months away however
The new LVR policy removes the present distinction between lending in Auckland and
rest of New Zealand. This amounts to a large tightening in credit availability for investor
lending. The RBNZ estimates that the new nationwide investor speed limit could
potentially affect around 70% of investor lending (which has constituted around 35-
36% of all lending in recent months). The new policy also represents a small tightening
for owner-occupiers in the rest of New Zealand where previously up to 15% of lending
could be to high LVR customers (in this case defined as a LVR above 80%).
What is a property investor, how do we define it?
It is largely unclear what the exact definition is. It is loosely defined as: a property is
considered to be an investment property and is not an ‘owner-occupied’ property.
Essentially it encompasses houses that are not lived by the owner, rather it is rented
out for investment purposes.
Does the 40 per cent deposit have to be cash? Or can it be cash/equity or just equity?
It can be either or a combination of the two. The only restrictions is that there is ample
capital available to absorb any loss or fall in house prices. In this way it will help to
cushion bank losses and prevent default when the housing market does correct.
Property market effect
Whilst it is still very early to know the full impact, past LVR restrictions did moderate
house price inflation. The proposed regulation in essence is attempting to cool demand
for housing. It is restricting the availability of capital to those that are speculating on
the continuation of the housing bubble. It still makes allowances for those that buy and
chose to live in their house.
It should deter foreign buyers as they will find it hardest to comply with the new
regulations. Given that they are unlikely to be owner-occupiers, they will now require
40% of the property value as a despite. Consequently, New Zealand property as an
investment class is now relatively less attractive.
Post the RBNZ first restricting LVR’s in October 2013, house prices corrected -5% (AKL
-8%) over a two month period, while 6-month rolling building consents decreased -2%
(AKL -5%). This quickly reversed and three months later both were above pre-
restriction highs. At the time the RBNZ was increasing the OCR.
Cash Rate implications
The new macro prudential tools outlined above should open the way for the RBNZ to
cut the cash rate further in response to low domestic and imported inflation. While segments of the economy remain fairly robust (tourism, immigration, Auckland construction, housing market) the effect of low dairy prices and the threat of global deflation appear to be outweighing the cost of further monetary policy stimulation. We see a 0.25bp cut to the cash rate in August to take the cash rate to 2.00%. From here there remains a district chance of one more cut before the end of the year if the data allows it. Further weakening of key inflation numbers or expectations along
with the level of the NZD on a Trade-Weighted basis (TWI) would be the most
important factors in determining the outcome.
Impact on listed related housing construction stocks – FBU, MPG
There is a positive relationship between house price inflation and residential activity.
Historically when housing inflation has slowed or turned negative activity has slowed
which is ultimately a negative for the housing and construction industry.
Fletcher’s Building has roughly 49% revenue exposure to residential construction
levels, while Metro Glass revenue performance has a very strong correlation with the
New Zealand housing consent numbers (see chart below). Clearly any material
slowdown in housing construction would lead to a dip in the performance of FBU and
MPG.
However, due to record high immigration numbers there remains an unsatisfied
demand for additional housing supply. Hence, whilst house prices can moderate we
believe the new housing construction will continue as planned. In Auckland alone, it is
estimated that an additional 25,000 houses are required to meet the medium term
demand. Indicated in the charts above, New Zealand residential housing consents are
nearing the all-time high as developments struggle to keep pace with new demand.
We expect the high level of demand to continue over the medium term.
Furthermore, the government continues to pressure both the housing industry and
local councils to increase total supply in order to address the current shortage. Large
periods of underinvestment and lock up land banks have prevented previous growth.
Consequently, while both FBU and MPG are closely tied to the performance of
house prices, believe they will largely be unaffected by the new LVR resections
as housing construction will continue as planned.