[ad_1]
OPINION: How does a housing market bubble inflate amid a global pandemic? The last few months have taught us that historically low interest rates and quantitative easing are a good start.
Relaxing loan-to-value constraints for borrowers, particularly investors, may also be the solution.
In March, the Reserve Bank of New Zealand was forced to act quickly when Covid-19 swept the world. The central bank slashed the official cash rate to a record low of 0.25 percent to jumpstart the economy and stimulate spending.
A month later, it removed loan-to-value restrictions for lenders for a year, effectively freeing up banks to make riskier credit decisions for borrowers, including investors.
Faced with a crisis unique in a century, central bank policies and government fiscal stimulus helped avert another Great Depression in New Zealand and steered us toward a tentative economic recovery. However, months later, it is clear that the actions of the Reserve Bank have added too much fuel to the fire in the real estate market.
READ MORE:
* TSB offers a 2.49% one-year mortgage loan rate
* Home loan restrictions could be lifted next week
* New Zealand investor sentiment is affected by lower term deposit rates
As the economy hobbled after locks this year, house prices have strengthened.
According to the latest data from the New Zealand Institute of Real Estate, median home prices rose 14.7 percent year-on-year in September.
David White / Stuff
In an effort to keep the economy going, the central bank has fanned the flames of the riskiest segment of the housing market.
While there are some positive signs (there are more first-time home buyers on the market after Covid), the statistics on investor activity should be cause for concern.
According to Reserve Bank data released this week, high LVR loans to investors (above 70 percent loan-to-value ratio) soared to $ 611 million in September, up from $ 204 million in June.
According to ASB’s analysis, homeowners have seen the largest increase in high LVR loans in recent months. In the three months through August, high LVR loans to investors rose 134 percent year on year.
In an effort to keep the economy going, the central bank has fanned the flames of the riskiest segment of the housing market. While it’s not up to the central bank to control asset prices, the central bank’s figures say they are monitoring investor activity.
KITCHEN / ROBERT THINGS
The Governor of the Reserve Bank, Adrian Orr.
Reserve Bank Governor Adrian Orr recently suggested that the central bank could reimpose LVR restrictions “if we believe banks are getting carried away and out of sustainable risk appetites.”
His comments were interpreted as a warning shot to banks amid a surge in high LVR investor lending.
Even Sir John Key is concerned. The former prime minister, now president of ANZ New Zealand, publicly expressed his fear that there is “a potential bubble of growing assets.”
“I think we have to be careful that we are serving the sector, not feeding a bubble,” the former prime minister said at a recent conference.
The comments come as the Reserve Bank plans to further support the economy.
John Key, now president of ANZ New Zealand, publicly expressed his fear that there is “a potential bubble of growing assets.”
The central bank is preparing a loan financing program, which will guarantee cheaper financing for banks and lower interest rates for borrowers. The Reserve Bank is also expected to cut interest rates to negative territory in the first half of next year. Mortgage rates are expected to drop to around 1.5 percent if these changes are implemented.
The likelihood of a further supportive policy from the Reserve Bank increased after weak inflation numbers last week. The consumer price index rose just 0.7 percent in the September quarter, prompting economists to reaffirm their predictions of a negative official cash rate.
With lower rates on the way and a shortage of new listings on the market, home prices will skyrocket in the coming months, putting early homes further out of reach for potential buyers. ASB now expects prices to rise 12 percent in the year through June.
Mike Jones, an economist at ASB, says high LVR loans are still a relatively small part of banks’ loan book, but he believes that increased investment activity “has added a bit of pressure to the market on the margin.” after Covid.
Abigail Dougherty / Stuff
It’s been a rough year for all Kiwis, but real estate investors are the last group in need of help, writes Daniel Dunkley.
“There are so many factors that affect every cohort of the housing market, from low interest rates to supply, that it is difficult to delineate what is most important,” says Jones. “Supply is probably the most important factor and the measures to boost demand.”
Jones expects the Reserve Bank to review the LVR limits, “in April or May, if not earlier”: “Their rhetoric is shifting from actively encouraging the housing market to expressing more caution, particularly about investors. It is possible. who want to see more data before making a call on LVR return restrictions. “
At the time of its decision to remove LVR restrictions in April, the Reserve Bank was working with dire forecasts for the economy and the housing market during the level four lockdown.
Worst-case scenarios were not met, and with months of data behind it, the central bank should surely readjust its LVR setup accordingly.
With the benefit of hindsight, the decision to unleash real estate investors was a mistake. House prices are growing increasingly out of control and out of reach, driven in part by speculators looking to take advantage of lax rules. The central bank should act now to reverse its mistake and restore financial stability.
The Reserve Bank shouldn’t make it easy for homeowners to keep first-time home buyers off the property ladder amid a pandemic.
In a difficult year for all New Zealanders, real estate investors are the last group to need a helping hand.
