The Reserve Bank expects new lending limits for Auckland property investors will reduce heightened financial system risk, and help moderate the Auckland housing market cycle, Deputy Governor Grant Spencer said today.
Speaking to the Northern Club in Auckland, Mr Spencer said that the resurgence in Auckland house prices over the past year has increased the Bank’s concerns about financial stability risks.
Mr Spencer said that Auckland prices have risen a further 24 percent over the past year, compared to 3 percent for the rest of the country.
“This has stretched the price-to-income ratio for the Auckland region to 9, double the ratio for the rest of New Zealand, and places Auckland among the world’s most expensive cities.
“New housing supply has been growing, but nowhere near fast enough to make a dent in the existing housing shortage. In the meantime, net migration is at record levels, and investors continue to expand their influence in the Auckland market.”
Mr Spencer said that investors are now accounting for 41 percent of Auckland house purchases, up 8 percentage points since late 2013. “We have seen a particular increase in purchases by smaller investors and investors reliant on credit. Half of the new lending to investors is being written at loan-to-value ratios of over 70 percent.
“This trend is increasing the risk inherent in the Auckland market. The increasing investor presence is likely to amplify the housing cycle, and worsen the potential damage from a downturn, both to the financial system and the broader economy.”
Mr Spencer said that macro-prudential policy can assist in moderating the risks to the financial sector and broader economy associated with Auckland’s housing market.
“A sharp fall in house prices has the potential to accentuate weakness in the macro-economy, particularly if banks tighten lending conditions excessively, leading to greater declines in asset markets and larger loan losses for the banks. A key goal of macro-prudential policy is to ensure that the banking system maintains sufficient prudential buffers to avoid this sort of contractionary behaviour in a downturn.
“Modifications to the Reserve Bank’s LVR policy, announced in May, are targeted specifically at Auckland residential investors. The speed limit has been eased for the rest of the country where housing markets are not subject to the same pressures.”
Mr Spencer said that the Bank recognises that low interest rates are contributing to housing demand pressures, and this is a factor the Bank takes into consideration when setting monetary policy. “However, the current weakness in export prices, economic activity and CPI inflation means that interest rate increases are likely to be off the table for some time,” he said.
He noted that the Bank’s macro-prudential policy is one of many measures aimed at reducing the imbalances in the Auckland housing market.
“Much more rapid progress in producing new housing is needed in order to get on top of this issue. Tax policy is also an important driver, and we welcome the changes announced in the 2015 Budget, including the two year bright-line test, the proposed non-resident withholding tax and the requirement for tax numbers to be provided by house purchasers.”