Property market bubble: what can be done?

Bubble, bubble, toil and trouble. The heat of the property market has been bothering New Zealand’s central bank the Reserve Bank of New Zealand (The RBNZ).

The RBNZ introduced restrictions on mortgage loan to value (LVR) ratios in 2013. But the policy hasn’t worked as well as some might have hoped. The RBNZ is thought to be considering further measures to dampen down demand in the overheated property market.

At the time the LVR restrictions were launched around 30% of bank lending was going to buyers’ with deposits of less than 20%. The policy stopped banks lending more than 10% of loans on a dollar basis to low LVR customers. It meant that many people who had saved a 5% or 10% deposit could no longer buy. It wasn’t, however, as successful as expected.

House prices surge

House prices grew in 2014 at a pace more akin to a housing boom than a market that had been dampened down. Nationwide house prices grew by 4.9% in 2014. In Auckland prices jumped on average by 9.8% and in Queenstown Lakes District the figure was 7.2%.

The LVR restrictions were meant to be temporary. But hopes by some they would be removed late last year have been dashed.

Managing director of the RBNZ Graeme Wheeler pointed out at the tail end of 2014 that the financial system still faced housing market imbalances.  “There remains a risk of resurgence in house price inflation, particularly in light of strong immigration flows,” said Wheeler.

Net migration hasn’t yet peaked in New Zealand, which is a potential catalyst for a property market bubble.

Investor trouble

The RBNZ, which won the Central Bank of the Year 2015 award, won’t say what measures it has up its sleeve, but Wheeler did hint that he’s looking at ways to curb investors who buy multiple houses.

They are the corner of the market which really is driving prices up, says Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research (NZIER). Many property investors escaped the LVR rules because they had sufficient equity to bypass them.

There has been talk that the RBNZ could rule that property investors who own more than five properties should be treated as small business owners. That would restrict investors to commercial mortgages instead of residential ones, making it more difficult to borrow and forcing them to pay higher interest rates.

The RBNZ’s arsenal

Eaqub says there are a number of other ways the RBNZ could act. It could, for example, bring in new restrictions around how much capital the banks must hold. Or it might move to make mortgages a less favoured class of loan.

If it was to take a more interventionist approach, it could also impose restrictions on loan to income ratios or debt serviceability, he says. Both Australia and the UK are looking at such measures.

Calls for action

The NZIER isn’t the only organisation that believes the RBNZ could impose further rules on banks and borrowers. Property valuation company QV and market analysts CoreLogic said in a joint release in late January that they believed the RBNZ could step in to do more to put a dampener on the market.

“Given that during the last three months of 2014 Auckland values rose faster than they did during the 2003 to 2007 boom, and some of the other main centres are also rising again, the Reserve Bank is likely to consider what action to take,” says Jonno Ingerson, CoreLogic director of research. .

What the RBNZ is unlikely to do is to raise interest rates because that will have other undesirable implications for the economy.

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