In New Zealand, Home Loan Restrictions Starting to Bite

November 12, 2013 10:54 PM

 

By Rebecca Howard

The hot housing market is the biggest threat to New Zealand’s financial stability — but tighter lending rules in place since last month seem to be taking some of the heat out of the market, Reserve Bank of New Zealand Gov. Graeme Wheeler said Wednesday in the central bank’s biannual Financial Stability Report.

Easy credit in the early 2000s fueled a housing bubble that the RBNZ tried to control by raising interest rates, with little success. With housing representing the majority of household assets and bank lending in New Zealand, an eventual fall in house prices in 2008 pushed the economy into recession even before the global financial crisis began.

That prompted the Reserve Bank to cut interest rates in March 2011 to a record low of 2.50%, where they’ve been ever since.

As a result, house price inflation has been ramping back up. In Auckland and Christchurch, which account for just over half of the country’s house sales, prices have risen 17% and 8%, respectively, over the past year. Nationwide, house price inflation is running at 9.8% a year and household debt is on the rise.

That makes it necessary to start taking the air out of the housing market gradually, as a sudden correction in housing prices “could result in significant financial stress,” Mr. Wheeler said.

That’s the backdrop for the RBNZ’s new rule that no more than 10% of banks’ new mortgage lending can go to borrowers who put down less than 20% of the price as a down payment.  Central banks worldwide have been experimenting with targeting specific pockets of financial excess — in particular the real estate sector, which was at the heart of the global financial crisis.

Initial evidence indicates banks have significantly scaled back their high loan-to-value lending and increased the cost of those loans since the rules took effect Oct. 1, Mr. Wheeler said.

“The initial evidence suggests there has been a change in market behavior,” he said, though he added that “it is too early to assess the impact of the measures on house price inflation.”

The RBNZ is expected to be among the first developed-nation central banks to raise interest rates since the global financial crisis, but most economists don’t expect any rate hikes until at least next March. Mr. Wheeler said Wednesday that the new policy tool is considered equivalent to a 30-basis point rise in interest rates over the first year it’s in effect.

“The message from today is that the RBNZ will not be resting on its laurels,” ANZ Senior Economist Mark Smith said. “By directly targeting areas of financial stability and inflation risk, these additional instruments will provide a helping hand to the official cash rate.”

The RBNZ said it will take three to six months to definitively gauge the rule’s impact. But Mr. Wheeler said anecdotal reports from real estate agents and mortgage brokers suggest “there was a material drop in buyer interest and transaction volumes.”

On Tuesday, data from the Real Estate Institute of New Zealand showed that house prices rose slightly on-month in October, but sales volume fell on a seasonally adjusted basis.

“Comments by agents from around the country indicate heightened levels of uncertainty for both purchasers and vendors about the impact of these changes,” said Helen O’Sullivan, the institute’s chief executive.

 

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