In today's email we looked in detail at the Reserve Bank's comments as it loosened LVR restrictions, and at the implications of the new directive to the Overseas Investment Office.
1. 'This is no green light'
As foreshadowed yesterday, the Reserve Bank only slightly loosened its Loan to Value Restrictions in way that would add less than $2.7 billion of borrowing to a market owing over $240 billion.
The timidity of the moves disappointed real estate agents and property investors, but the Bank was cautious about further loosening given the risks of another breakout in house prices.
Governor Grant Spencer was at pains to portray the slight relaxation of Loan to Value Ratio restrictions as no 'green light' for home buyers and bankers to jump back into a market about to boom again. He also rejected the idea it had been done to stop the market falling further.
Spencer was speaking to MPs in the Finance and Expenditure Select Committee after he announced the bank would loosen LVR restrictions on owner-occupiers and landlords just slightly from January 1.
Asked by new Labour MP Deborah Russell what signal he was sending to investors about the housing market, he said: "We certainly don’t want to give the signal that it is some sort of green light that the housing market is back on."
"The signal is more that our expectation is that the housing market is going to remain flat and is not about to resurge again, but there is a little bit more room for high LVR loans, and a lot of that would be taken by first home buyers," he said.
"It is more a toe in the water signal and comment that this is not major event that is really going to impact the market. "
Earlier the bank announced that 15 percent of loans to owner occupiers could be done with deposits of less than 20 percent, which was up from the previous 'speed limit' of 10 percent. It also cut the deposit requirement for landlords to 35 percent from 40 percent, but left the speed limit for this lending at just five percent.
Asked by former Finance Minister Steven Joyce if the Reserve Bank's continued restrictions and the new Government's actions would cause a downward correction in the housing market, Spencer said he thought the various measures would only have a small impact.
"We don’t own or control the housing market. We have an impact at the margin," Spencer said.
"In terms of a risk of a downward correction, we think that is a low probability because of the underlying housing shortage that we think still persists, particularly in Auckland," he said.
A lot of the moderation had come from the investor side of the market, where buying and lending had come off at the same time as a change in sentiment from these types of buyers, he said.
"A lot of these policies are affecting the potential return of investors. So in some areas there may be more sales of investor property than purchases. So I think it is very clearly a dampening factor on the investor side, but on the other side (owner occupier) you still have a shortage.
"There are still people coming into the country and not enough houses being built to close that gap. So in that sense I think as long as that fundamental shortage exists I think it is very unlikely you have any real risk of the tanking of the housing market."
The Reserve Bank did not give a time frame for relaxing the rest of the LVRs and described the relaxation of the deposit limit for landlords from 40 percent to 35 percent from January 1 as only moderate.
"The Reserve Bank estimates that around half of investor loans were being originated at LVRs above 70 percent immediately prior to the introduction of the LVR restrictions in 2013," it said in the half-yearly Financial Stability Report.
It said the criteria for further relaxation was evidence that house price inflation and credit growth had fallen to around the rate of household income growth, which was currently around five percent. It noted that household credit growth was easing, but remained above income growth.
"Gradual adjustment to policy will reduce the risk of resurgence in the housing market and a deterioration in lending standards," the bank said.
2. Only small borrowing boost
The Reserve Bank was not specific about how long it would take to completely drop the restrictions, but was more specific about how much extra borrowing could be done within the slightly looser limits.
Spencer told the FSR news conference he was not expecting a significant increase.
"The main message here is that this is an incremental change. It’s an adjustment, giving the banks a little bit more room to use those higher LVR loans as appropriate, but we would expect that a relatively greater proportion of first home buyers would benefit from this, given that the existing higher LVR lending does tend to be more shifted towards the first home buyers rather than other owner occupiers," he said.
Reserve Bank statistics show there was $3.94 billion of new lending to rental property investors at LVRs of over 70 percent in the year to the end of October. There was $39 billion of new lending to investors at LVRs under 70 percent. The policy shift (to 40 percent to 35 percent deposit is outside that bucket of lending with LVRs over 70 percent (ie a deposit of less than 30 percent).
The Reserve Bank's Head of Macro-Financial Stability Bernard Hodgetts pointed out that $54 billion of new loans were to owner occupiers over the last year, so a five percentage point shift in the amount allowed to have an LVR of over 80 percent would be $2.7 billion. The housing market is worth over $1 trillion and home owners owe $240 billion in total.
Spencer also downplayed the prospect of a big increase in bank lending.
"We also feel that bank credit standards, which have been reasonably tight, that that is going to continue, in that we do surveys of the banks and the levels of their credit standards, and we think they will still be applying a pretty tough approach going forward," he said.
Spencer said the restrictions would be reviewed internally every quarter, but there was no schedule for removal.
He rejected the suggestion that the loosening was done to prevent a worsening of the housing downturn.
"We are not acting because we are concerned that things are about to fall off the edge," he said.
"But obviously the govt policies reinforce the decision and give us comfort that there are a number of other policies and factors that are going to keep the housing market risks contained."
3. No lover of hybrid vigour
Separately, the Reserve Bank was asked about the use of hybrid capital instruments by the big banks to raise enough capital needed to meet their requirements.
The hybrid instruments are a mix of debt and equity that can be turned into all equity when necessary, but are not the pure equity the regulator would prefer. They are slightly cheaper instruments for the banks, who naturally want to hold as little equity as possible to keep their profitability high.
The Reserve Bank is currently conducting a review of hybrid instruments and has already forced Kiwibank to drop its use of the instruments.
"We have received submissions and our next stage will be to come back and give a clearer indication of where we are going on the eligible capital instruments, but as indicated in our consultation document we think there are issues around hybrid instruments and we are not particularly attracted to them," Spencer said.
"They are complex and we are not sure they really serve a good purpose in terms of being a strong capital instrument, particularly for supporting going-concern capital in a stress situation," he said.
"We will talk further about this when we put out our next document, but our indication of direction is not supportive of the hybrid instruments, but I don’t want to predetermine our final position at the moment."
Spencer was also asked about Westpac's recent disclosure that its internal models for capital weren't all compliant with Reserve Bank rules.
Spencer said Westpac was the only bank of the big four Australian banks who had not met the regulator's standards for its internal models.
"The others are getting their models approved and we don’t have issues with those. We have been checking and we are confident that there is no repeat of the Westpac issue with the other three banks," he said.
Spencer defended the bank's decision not to prosecute Westpac's directors, saying the bank's public reprimand of Westpac was an appropriate response.
Deputy Governor Geoff Bascand said Westpac had been put on notice that if they did not comply within 18 months then they would lose their accreditation.
4. DTIs now years away
The Reserve Bank also indicated that the urgency behind its push to have a limit on debt to income (DTI) multiples had further waned upon the arrival of the new Government.
Then Finance Minister Steven Joyce postponed the Reserve Bank's moves to include a DTI limit in its macro-prudential tool kit earlier this year. New Finance Minister Grant Robertson has also expressed his reluctance to adopt the measure.
"We still think a DTI or some debt servicing instrument is appropriate to have in the macroprudential toolkit but what we have agreed with the govt is to postpone further consideration of DTIs or that type of instrument for the macroprudential review that Treasury and ourselves will be taking over the next year," Spencer said.
"And elements of this will also come into the government’s review of the Reserve Bank Act -- the second phase of that review (the first phase being focused on monetary policy)," he said.
"We still think it’s relevant to have in the tool kit. We certainly don’t think it’s relevant to be applying now given the housing market has moderated substantially, but consideration of that has been deferred somewhat.
"I am comfortable with postponing the adoption. We were never in the position of saying we were going to put on DTIs or felt they were necessary to apply in the near term given that the market has been coming off and risk has been reducing in the bank’s balance sheets. But the housing market is cyclical and down the track there will be another housing cycle and debt service instruments may well be appropriate at that time."
5. A large farm is now bigger than 5ha
Associate Finance Minister David Parker and Land Information Minister David Parker yesterday announced the issuance of a new directive to the Overseas Investment Office (OIO) designed to dramatically restrict foreign buying of sheep, beef and dairy farms. It takes effect from December 15.
Previously, foreigners had to apply to the OIO to buy land on dairy farms with more than 1,987 hectares and sheep and beef farms with more than 7,146 hectares. That meant most small to medium sized farms, particularly those ones affordable to share-milkers, were able to be bought by foreign buyers without OIO approval.
"Today’s announcement raises the bar for overseas investments in sensitive land by replacing the existing large farm directive, with a new and much broader, rural land directive which applies to all rural land larger than 5 hectares other than forestry," Sage said.
Newsroom's Sam Sachdeva reported from the news conference that Parker and Sage gave that Parker saw the change only causing minor price falls at the margins.
"People who commit themselves to New Zealand, pay tax in New Zealand, they’re the ones who should have first bite at buying our land assets," Parker said.
"We think that impediments to share milkers graduating to be farm owners are wrong, and they shouldn’t be effectively prevented or blocked in their progress in life from a one per center from overseas bringing their wealth from a low-tax jurisdiction or from countries that have got far higher rates of inequality than we have."
Federated Farmers welcomed the changes. Vice-president Andrew Hoggard said the Government had struck a balance between ensuring foreign buyers benefited New Zealand while not "closing the door" on investment in the primary sector."
However, the new directive made clear the change to five hectares did not apply to forestry land, although forestry land buyers would have to prioritise local processing, rather than exporting logs.
“The new directive for forestry directs the Overseas Investment Office to place high importance on increased processing of primary products and the advancement of the Government’s policies when assessing applications for consent," Forestry Minister Shane Jones said in a statement.
“It also emphasises that Ministers expect the Overseas Investment Office to impose conditions on consent where appropriate – for example, a requirement for the overseas investor to enter into a supply arrangement with a local processor," he said.
6. Large farm? Or a lifestyle block?
Newsroom's South Island reporter David Williams reported the directive put larger lifestyle blocks around Queenstown directly into the firing line for an OIO approval process for foreign buyers.
Queenstown lawyer Graeme Todd has been involved in several high-profile sales of rural land to foreigners, including Hunter Valley Station’s lease to US TV presenter Matt Lauer and his wife Annette. (As an aside - Matt Lauer was today fired by NBC for inappropriate sexual behaviour in the workplace.)
After reading the directive letter, he told David it was going to be extremely difficult for certain investments to be approved without significant improvements, such as increased investment in properties or productivity, or increased exports.
“To that end it is hard to see, for example, how lifestyle blocks in excess of five hectares – and up to, say, 150 hectares – as stand-alone investments could be approved.”
Todd didn’t see any major changes for larger properties, other than greater weight being applied to factors that have always been important.
Harcourts Queenstown CEO Kelvin Collins said there might have only been a handful of large lifestyle blocks sold in or around the resort town the last year. Who to? “It’s Australians more than anyone else.”
Professor Natasha Hamilton-Hart, of University of Auckland’s faculty of business and economics, said she had little sympathy for potential hurdles for lifestyle block sales.
“In the normal run of things, I fail to see what the national benefit is of selling lifestyle blocks to foreigners.”
The directive letter hints at tougher constraints on lifestyle property sales to overseas investors. Many rural property purchases have been waved through by the OIO after promises by the buyer to donate to local trusts or causes. But the Government’s letter dictates the OIO should consider sponsorship of community projects and donations to be “generally of low relative importance” when applying the test of consequential benefits to New Zealand.
Hamilton-Hart said it’s a positive signal for the Government to promote foreign investments that demonstrate “additionality” to the country, such as jobs, technology or access to overseas markets. The danger, as she saw it, is the move is perceived as a regressive step that makes investing in New Zealand more cumbersome than it already is.
7. Coming up...
Finance Minister Grant Robertson is scheduled to give a major speech in Auckland on Friday morning. He is expected to announce the date of the half year fiscal update and the Budget policy package.
8. One fun thing
Twitter continues to amuse itself with the strange goings on in American politics.
John Cleese: "That strange rustling sound coming from the White House is the flapping of white coats. God speed, gentlemen !"