Construction demand tipped to remain high

Its latest Financial Stability Report was released this morning.

There have been concerns raised by builders and brokers that the new house market may slow considerably more than other sectors under the new LVR restrictions.

Banks must lend no more than 10% of their new loans to borrowers with a deposit of less than 20%. But because construction loans are more complex, commentators have said they may be avoided. Builders have reported losing first-home contracts.

It has been suggested that new homes, which help address the supply side of the housing problem, should be exempt from the rules.

Graeme Wheeler said the bank was looking at the issue. But he said high-LVR lending for construction was only about $60 million to $80 million a month, or 2% to 3% of the market. He said he expected demand to remain strong – consents are 50% up on an annual basis from where they were in 2011.

“The market price in Auckland and Christchurch is running ahead of the cost of new building.”

Deputy governor Grant Spencer said banks had cut back their low-deposit lending strongly to start with but would come back. “Once some high-LVR lending comes back in, some could cover new building.
Wheeler said if the Government was deeply concerned about the situation, it would engage with the Reserve Bank. But he said so far it had left decisions to the Bank. “The memorandum of understanding has been respected so far.”

Wheeler said it was too soon to say whether the LVR restrictions were having an effect on the demand side of the equation. Rising house prices and household indebtedness were a big concern for the Reserve Bank, he said.