RBNZ policy meant to chill Auckland market - but will it?

Westpac chief economist Dominick Stephens

Westpac chief economist Dominick Stephens said the announcement of the policy over four months before implementation was intended to have an immediate chilling effect on the Auckland property market.

Whether it would or not was unclear as, unlike the buyers who rushed to get in the door before the last LVR restrictions came into force in 2013, investors are focused on capital gain and won’t face the same incentive.

Stephens said the RBNZ estimated the new restrictions could reduce Auckland house price growth by 2-4%, which would work out to around 1-2% on the national average, and wasn’t a huge impact.

“RBNZ data shows that only around 2% of property investor loans are originated at LVRs above 80%, so a 70% limit on property investor loans is actually not that tight.”

The loosening of LVR restrictions in the rest of the country may not have much impact either, he said.

“This is because the share of high-LVR lending in those regions is already running well below the existing 10% limit.”

Stephens said Westpac had already allowed for tighter LVR restrictions in their house price forecasts.

“So we see no reason to change our house price forecasts - we continue to anticipate 10% nationwide house price inflation this year, and 4.5% next year.”

ASB chief economist Nick Tuffley said that, if there was a reduction in turnover [and the RBNZ estimates property transactions could fall by 8%] and house price inflation in Auckland, it would indicate investors being shut of the market due to the higher LVR restrictions.

However, he noted the restrictions do not extend to new builds or off-the-plan apartment purchases.

“Therefore, at the margin, we could see some investor demand shift to reflect easier lending in these categories. Such a shift would further encourage a much-needed lift in supply in the Auckland market.”

When it comes to the impact of the policy on the rest of New Zealand, the RBNZ estimates that turnover could pick-up by 4% and house price inflation could increase by 1%, Tuffley said.

“Relaxing the ex-Auckland restrictions is an acknowledgement that prices pressures are most acute in Auckland and muted outside that region.”

The RBNZ’s policy changes were more proactive than expected and showed a more targeted approach, ANZ senior economist Philip Borkin said.

“The regional measures, which initially were put in the too-hard basket by the RBNZ, show that the RBNZ is now responding where it sees pressures, while also easing settings where pressures are not as evident.”

Borkin said he did wonder about the extent to which investors could simply shift their debt loading onto their own home or investment properties outside of Auckland.

In his view, the RBNZ’s expectation for banks to immediately behave in a manner consistent with the “spirit” of the changes, would lead to a shift in sentiment and behaviour in both lending and the broader Auckland housing market from today.

However, HSBC’s chief economist Paul Bloxham said it was likely to be at least March 2016 before the RBNZ felt confident in drawing any conclusions on the effectiveness of the measures.

“As with the current LVRs, there is typically a small short-run effect but, in the end, still below-neutral interest rates and Auckland's fundamental housing supply shortage may limit the impact on housing prices.”

Bloxham said that, nationally around half of investor commitments are at LVRs of more than 70%, but around 97% of new investor mortgages have an LVR of less than 80%.

“That suggests many investors are likely to be able to provide a slightly higher deposit in order to bring the LVR below 70%, especially if they have benefited from rapidly rising prices across an existing portfolio (and therefore have equity that can be released).”

He said that, overall, HSBC still expects strong house price growth over the next couple of years.

All of the economists felt that the RBNZ’s move opened the door for them to ease monetary policy and cut the OCR later in the year.