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It’s not a bubble yet, but New Zealand’s growing housing market is a big problem that will require big, bold responses to fix, experts say.
House prices were already outpacing earnings, before the coronavirus pandemic hit, and a concerned reserve bank temporarily removed loan-to-value (LVR) restrictions in May.
There is a growing expectation that the central bank will reinstate restrictions on its 12-month self-imposed term due to the uncontrolled growth of activity in the property market.
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New Zealand’s burgeoning housing market is a big problem that will require big, bold responses to fix, experts say.
The worst coronavirus scenarios – a major economic recession, a surge in unemployment, a drop in house prices – have yet to be met, so instead of fueling a declining economy, the removal of LVRs has helped. to a real estate sugar rush.
“In the initial stage of the crisis, the banks were incredibly concerned and we also saw the credit markets tightening, so they were also concerned about their access to long-term financing channels, especially for our smaller banks,” he said economist Benje Patterson.
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* The Reserve Bank must realize that it has done too much for the real estate market.
First-time homebuyer Christina Bain said she and her husband were lucky to be able to buy in Auckland in September, particularly when they found a “gem” without the bank having to talk to them again about pre-approval.
He said they walked in just as things “were starting to get crazy” but struggled with long wait times and delays in obtaining information and approval during the process.
“The removal of the loan-to-value ratio did not help us much in our case, [it] it apparently made it more difficult to obtain correspondence from the bank. “
The couple initially began searching late last year, but put off their plans until May to make sure they were ready. The first Covid-19 crash really affected their ability to save for a deposit, but they managed to get 10 percent. However, they then needed to save up to 15 percent to get over the line. “We feel pretty bummed out,” Bain said. When they found a “gem” they loved in Papakura, which hadn’t been sold at auction just a few days earlier, the couple had yet to receive a response from the bank on pre-approval due to long wait times, he said. .
“We were quite anxious. We didn’t know how much the bank would lend us. ”
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Early Home Buyers Natalie Dixon and Craig Martin
Natalie Dixon and her partner Craig Martin recently purchased a home in Christchurch and were impressed with the value for money in the city.
“We took a look at the North Island, places closer to families, and we couldn’t believe how expensive those places were in comparison.
Dixon said that cemented his thinking about buying his first home in Christchurch.
“We had to go to auction, which was pretty scary, and we spent about $ 20,000 more than we thought, but we’re very happy with that.”
Dixon had many friends abroad who were thinking of returning to the country. “I think Covid has unfortunately been a good marketing tool for New Zealand.” (edited)
Patterson said that a combination of the Reserve Bank ensuring that banks could borrow as much as they needed, and New Zealand’s response to Covid-19, had meant that our economy was an attractive proposition for some of the cheap money currently circulating. in the world.
“It is quite clear that the justification for removing [LVRs] It has not developed in the way that the Reserve Bank expected at the time, and the reasons why they had them before are still there, and if anything is getting worse again, “said Patterson.
The goal of LVRs when they were introduced in 2013 was to improve financial stability and banking practices, and the Reserve Bank was concerned about bank exposure if falling house prices tipped homeowners toward negative net worth. At that time, it was not difficult to obtain a mortgage with a deposit of 10 percent or less.
LVRs didn’t stop house prices from rising or investors from expanding their portfolios, but they were a hindrance.
Momentum in the housing market is being driven by ultra-low interest rates, even with five-year fixed rates below 3 percent, which means that borrowers can pay off large amounts of debt, if they can keep their jobs. .
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The last thing the Reserve Bank wants is a total collapse in house prices, says economist Benje Patterson.
Given the fundamentals supporting the housing market, Patterson said it wasn’t really a bubble. The challenge was the widening gap in wealth between the 60-plus percent of people who are homeowners and the rest.
“For those who are excluded from the housing market today, it is problematic. We have seen that rents have increased throughout the country and those people are not benefiting from the lower interest expense. “
When Covid-19 hit, the Reserve Bank was concerned that banks would need more leeway to lend money, and at the same time thought that relaxing LVRs might help some first-time home buyers.
That turned out to be the case, but there has also been a great deal of investment activity, Patterson said.
“The Reserve Bank is likely to have to take a more balanced approach going into 2021.
“I think there will be some pressure for them to see how they can balance low interest rates, a lot of access to money, with a situation that not only allows investors who are already quite wealthy in capital to go out and exploit the situation to the detriment of such You see younger people. “
The last thing the bank wanted was a total collapse in house prices, which would cause a lot of distress in the economy as spending dried up and confidence fell.
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We have to address demand, but also fix the housing shortage, says Infometrics economist Brad Olsen.
So are people who cannot afford a home being sacrificed for the broader economy?
“That’s one way of looking at it,” he said. However, the central bank’s goal is to look at things from a broader economic perspective, ensuring low inflation, high levels of employment and output, and maintaining financial stability.
Infometrics senior economist Brad Olsen said the Reserve Bank had been quite specific about sticking to its word in the past and would be reluctant to break its 12-month hiatus earlier.
“I think we are likely to see in the next financial stability report in late November that the bank will make it very clear that it expects to put LVR back, or change restrictions, in May unless it sees a material change between now and its next statement “.
The return of LVRs would not stop the rise in house prices, but it would take some pressure off the market, he said. Investors would be a bit more restrained, but they would still play an important role.
The end of the mortgage deferral plan in March would help slow the market.
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The return of LVRs would not stop the rise in house prices, says Brad Olsen.
Olsen was also concerned about the growing risk of inequality and the possible effect it would have on the broader economy.
“Eventually there is the risk that people will start to have to make pretty tough compromises between keeping a roof over their head or other parts of their lives, so that’s where the extreme risk ultimately becomes.”
Addressing the demand side with short-term actions had to be balanced by solving the long-term problem of homelessness.
“I think the government has in some ways abdicated responsibility for housing in recent years, and perhaps in the last decades, because we continue to face these sustained problems,” Olsen said.
Researcher and author Dr. Jess Berentson-Shaw said there was a feeling that people were “absolutely fed up” with the country’s housing crisis and wanted some solutions from the people in power.
LVRs were an important tool, but the lack of affordable houses, and the lack of houses in general, was a systemic problem that would not be solved with small corrections, he said.
As existing owners took advantage of their properties to take advantage of low interest rates, ownership of the property was becoming more concentrated in the hands of the owners and further out of reach of the rest.
It is an issue that must be tackled on multiple fronts, including taxes.
Even 30 years ago, more people made money just from income from work, he said, and now capital was where people derived their wealth.
“So unless we do something about how people with equity pay the public system to create more housing for people, we are never going to get over this.”
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Dr. Jess Berentson-Shaw says people are “absolutely fed up” with the country’s housing crisis and want some solutions.
Where homelessness shocked people five years ago, it was now that the middle classes were being completely excluded from having a home.
The coronavirus pandemic had shown that the government could take big steps, and the elections had given it a mandate to bring about change, he said.
“People really care about housing, and I really think there is a real opportunity here to do something about it, and in terms of a legacy, it is quite important.”
