Market cooling might last - ANZ

Tuesday 1 November 2016

Evidence that the Reserve Bank’s latest LVR rules are starting to bite just keeps coming and now ANZ economists are suggesting the impact may be permanent.

By Miriam Bell

The September market data from most sources, but notably REINZ, showed the housing market has slowed, while last week’s mortgage lending data recorded a big decline in lending.

Yesterday’s data from myvalocity, which showed a sharp drop in new mortgage registrations, provided further evidence of the trend.

While it was always expected that the new LVRs would reign in the runaway market to an extent, the question has always been whether their impact would be more than short-term.

The two previous rounds of LVR requirements introduced by the Reserve Bank have had a temporary effect on the market – before the ongoing high demand, shortage of supply equation has pushed the market back into high octane mode.

Many commentators expect the pattern to be repeated with this round of new LVR rules as the same supply and demand factors remain at play.

However, ANZ economists have said there are some important factors that mean this cooling of the market is likely to last for longer, although they don’t expect a market correction.

“Valuations are certainly stretched and risks have increased, but outright weakness is hard to envisage when net migration flows sit at records, supply is responding only slowly, interest rates remain historically low and the underlying economy is still performing well.”

“Cooling” is quite different to “cool”, they said.

“But we do feel that it is now less likely that the market bursts away again in a few months’ time as it has done before.”

In their view, an important reason for this is that banks are now actively rationing credit and leaning against activity at the top of the cycle.

At the same time, an expected OCR cut this month is likely to be the trough in the current interest rates cycle which means the market impetus provided by falling interest rates is likely to be past.

Alongside this, valuations are even more stretched than they were, the economists said.

“In Auckland, we estimate that the ratio of house prices to income is close to 9 times. When the initial LVR restrictions were introduced, it was 6½ times. Nationwide, the ratio is now close to 6, when it was less than 5 in 2013.

“Over 50% of average disposable incomes are now needed to service the debt required to buy the median house in Auckland with a 20% deposit. Despite historically low interest rates, that is on par with 2007.”

On top of these factors, the Reserve Bank is likely to introduce further macro prudential measures and other policymakers are also stepping up their efforts.

Residency visa requirements have been tightened and increased funding for social housing has been mooted, they said.

“From a political perspective, the pendulum is swinging more actively towards restraining demand and boosting supply.”

The economists said this combination is no panacea amidst a housing shortage in Auckland, as well as Wellington and the Bay of Plenty.

“But these factors should temper the market’s natural push to keep rising, and effectively buy time for the supply side to adjust and respond – which it will, over time.”

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