The Reserve Bank of New Zealand (RBNZ) is clearly concerned about the residential property market. In a statement, released last Thursday, the bank said: “House price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability”. Rental yields are now so low (approximately 3% in Auckland, well below the cost of funding) that investors can only be buying property in the anticipation of further house price gains (i.e. speculating!).
Last Thursday’s statement follows an announcement by the RBNZ earlier in the week detailing further restrictions to be imposed on the residential property market to come into effect from September this year. Specifically:
- A limit for all investor lending, permitting no more than 5% of lending at a Loan to Value Ratio (LVR) greater than 60%. This essentially enforces a 40% deposit on the majority of investor lending. The RBNZ expect this to impact around 70% of investor loans with investors accounting for around 35% of house purchases nationwide.
- A limit for all owner-occupier lending, permitting no more than 10% of commitments with an LVR of greater than 80% (this was previously 15% of commitments outside of Auckland).
The new restrictions are intended to help ease demand for housing and reducing risk within the major retail bank’s balance sheets. The restrictions are far heavier than the LVR tools introduced in 2013. At the time, we saw the property market pause for only a few months before resuming its upward rise. However, other buyer requirements introduced at the time, including a New Zealand bank account and IRD number, may have caused the market hiatus. Given the price appreciation we have seen across the market, many property investors may have built equity well above 40% within their portfolios and could be able to continue to increase borrowings.
The RBNZ is facing a dilemma. From a financial stability standpoint, it is clearly concerned about the residential property market. However, addressing the current lack of inflation in the economy (currently only 0.4%) is the RBNZ’s main monetary policy target and should see interest rates cut. This only further fuels the property market. The RBNZ restrictions announced last week have positioned the bank to be seen to being doing something about the property market and allow it to cut the official cash rate further on 11 August.
The latest iteration of the RBNZ’s restrictions on lending may see a short term levelling in residential property prices. There may be further to come from the RBNZ in the form of loan to deposit restrictions. However, fundamentally residential property prices are determined by supply and demand. The 60% LVR limit on investor lending may be good for financial stability but is unlikely to provide long term resistance to further price appreciation. We continue to monitor supply and demand. There is no silver bullet.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.