real economy

English wants home loan limits gone

Prime Minister Bill English has rediscovered his jawbone and has sent a clear message to the Reserve Bank that he expects it to start thinking about scrapping its restrictions on loan to value ratios, now that house prices across the country are flat or falling. He also said a new limit on debt to income multiples that the bank wanted to introduce was no longer needed.

Speaking to reporters before National's Tuesday morning caucus meeting, English also said he saw no need for the introduction of debt to income ratios because it was "pretty obvious" that there had been a correction in the Auckland housing market.

The Reserve Bank introduced its first version of Loan to Value Ratio speed limits in October 2013, which included an across-the-board 20 percent deposit requirement. The Government agreed after initial objections, and only on the grounds the restrictions would be temporary.

The Reserve Bank has stopped talking about the measures being temporary and has been consulting on the introduction of a new tool - the debt to income ratio limits - to slow lending to home buyers. This is a potential limit on debt to income multiples (DTI), possibly at around five times income. Reserve Bank Governor Graeme Wheeler repeated last week that he wanted the tool just in case the housing market took off again after the election on September 23.

The initial restrictions slowed house price inflation for a few months before a lack of housing supply and record high migration drove another acceleration through 2014, particularly after the re-election of the National Government dampened speculation about a Capital Gains Tax and foreign buyer restrictions.

The Reserve Bank introduced a second round of restrictions in Auckland in November 2015, which included a 30 percent deposit requirement for investors. The second round slowed the Auckland market for a few more months, before it accelerated again through early 2016. The Reserve Bank then introduced a third round of restrictions in October 2016, which included a nationwide 40 percent deposit requirement for landlords. That has played a major part in a sharp fall in house price inflation in Auckland, where prices are now down around three percent from their September 2016 peak. Price inflation has also slowed elsewhere in the country.

"A good regulator" would be clear about when they should be lifted

Questioned about whether it was time for the LVRs to be lifted, English said he expected the Reserve Bank would now be considering when conditions were right to lift the restrictions.

"I think it is pretty clear that that policy, along with a number of others, has got prices flattening off. It takes a bit of pressure out of the market. The Reserve Bank makes those decisions according to their views about financial stability, so I would expect that they are doing work on what conditions would have to be met to remove them, but there is no indication yet that they are going to," English said.

The Real Estate Institute of New Zealand called for a review of the LVR rules for first home buyers earlier this week.

If you bring something in as a temporary measure, then you should be clear about what’s involved in removing that measure.

Questioned again, English then revealed that he had indicated to the bank they needed to be planning for the removal of LVRs, saying a "good regulator" would be clear about what conditions needed to be met for the removal of a macroprudential measure that was intended to be temporary.

"In my meetings with them I have said that I would expect that they would be thinking through what the conditions would be, but it’s their decision about how they deal with it," he said.

"If you bring something in as a temporary measure, then you should be clear about what’s involved in removing that measure.

"It’s just that they were always meant to be a temporary measure so they need to think about what conditions would be place to remove them – but I have to say there is no indication at the moment that they are going to remove them right now and the market, as you say, is flat and in some places falling.

"I don’t want to give the public the impression that politicians can decide to remove them. The Reserve Bank decides that, but they do need to think through the conditions that need to prevail so they can remove them," English said.

"It’s important that the people who put them in place have thought through the conditions under which they would remove the LVRs because, ideally, they are not a permanent feature of the market.

Asked if DTIs were now off the table, English said he saw no need for further macroprudential tools to be added to the Reserve Bank's toolkit.

"We don’t see the need for further tools. Those are been examined, and if there was a need for it we would be open to it, but we don’t see the need at the moment.

No, we won’t be looking at it before the election."

The housing market on the turn

Asked if there had been a correction in the housing market, English said: "I think that is pretty obvious. The prices were rising at 15 to 20 percent per annum and are now pretty much flat and I think that’s progress.

"We are seeing some sort of correction. We are yet to see how it will flow out. Some real estate agents are saying that because of the election that’s prolonging what would usually be a quieter winter period and that prices might pick up again after the election. That might depend upon the certainty or otherwise of Government policy."

'Be worried about Labour'

In a clear attempt to appeal to homeowners and investors already worried about the value of their properties falling, English warned that "uncertainty" over whether a Labour-led Government would bring in capital gains tax or other new taxes might be dampening house prices.
"I think the big uncertainty at the moment is Labour’s tax policies, so they are trying to stop themselves from saying they want to do a capital gains tax and they are talking about putting up income tax, those things would have an effect on the housing market, everyone paying petrol tax has some impact on their income - so there would be a lot more uncertainty if the Government changes," English said.

Ardern open to CGT in first term

Asked if a Labour win in the election would cause house prices to drop further, Labour leader Jacinda Ardern said: "I reject that."

Ardern said the party had been very clear about its policy around capital gains tax.

"We have made it very clear we are not campaigning on a capital gains tax and we do not believe in a capital gains tax or anything similar applying to a family home - but at the same time we have also acknowledged that we don’t think there is fairness in our taxation system.

"We have proposed a review, which we hope to hold in Government, which we will hold in Government. I am not pre-empting what that review will find.

"We do not think that assets are treated fairly relative to other forms of taxation in New Zealand. The fact that someone can go out and work a 40 hour week and pay tax on that, and someone can own multiple homes, flick them off for capital gain and is often not treated in that same fair manner is something that needs to be addressed. And most countries have. New Zealand sits on its own in that regard. But I am not going to pre-determine what that working group will find.

"But I am maintaining our right and ability to act on the findings and do the right thing when we are in Government."

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