Auckland house prices: buying frenzy tipped after Reserve Bank announcements

New Zealand’s red-hot housing market could soar to unprecedented heights this summer as home buyers rush to buy before stricter home loan rules are reapplied.

Home prices were already at record highs in recent months, as homes sold for hundreds of thousands of dollars above council valuations and a Remuera home even sold for $ 4.4 million this week despite to be described as a replacement.

Now more fuel could be added to the fire through two announcements by the Reserve Bank made yesterday.

The government-backed bank said it was considering re-restricting so-called loan-to-value ratios earlier than expected, a move that experts say could see real estate investors entering the market in greater numbers.

He also planned to lend more cheap money to commercial banks, which means they would likely have more money to lend to home buyers.

Bottom line: The two powerful new incentives would likely give home seekers and investors a reason to buy earlier and potentially drive prices up faster, said Ray White Manukau real estate owner Tom Rawson.

“You will see mortgage loan applications skyrocket and in the coming months they will go crazy again,” he said.

The Reserve Bank move came as New Zealand’s supercharged property market turned political again.

Prime Minister Jacinda Ardern recently expressed “concern” about the social impact of high house prices.

New Zealand and Auckland reached record median sales prices of $ 685,000 and $ 955,000 in September, the Institute of Real Estate said.

The sale prices of three properties that went under the hammer through Ray White in Auckland on Tuesday night far exceeded their CVs.

A solid stucco three-bedroom house from the 1940s in One Tree Hill bought for $ 1,281,000 – $ 301,000 on CV.

On the road in Onehunga, a mid-19th century worker’s cabin sold for $ 936,000 – $ 156,000 more than his CV.

And further east, in Bucklands Beach, a 1970s weather table house sold for $ 1,265,000 – $ 265,000 more than CV.

Record prices appeared to be driven by historically low interest rates that made home loans cheaper and “fear of getting lost” among buyers.

Changes in the loan-to-value ratio also played a role.

Previously, LVR restrictions meant that banks could typically only grant investors a loan for a maximum of 70 percent of the value of the home they intended to buy.

Investors would have to increase the other 30 percent of the home’s value themselves.

But in May, the Reserve Bank temporarily halted LVR restrictions for at least a year.

The decision was based primarily on a technicality.

Their goal was to prevent banks and homeowners, who had taken vacation pay on their mortgages due to fear of losing their jobs during the Covid-19 pandemic, from inadvertently breaking LVR rules.

But banks instead used the relaxed rules to make more “high LVR” home loans to people with lower deposits.

This saw a 134 percent increase in high LVR loans to real estate investors compared to the previous year, said ASB economist Nick Tuffley.

The buying frenzy, coupled with the acquisition of more homes by real estate investors, prompted economists and others to ask the Reserve Bank to bring back LVR restrictions earlier than planned as a way to cool the housing market.

The Reserve Bank responded yesterday by announcing that it would begin consultations in December on the possibility of re-establishing the restrictions next March.

“We are now seeing rapid growth in loans to riskier investors,” said Lt. Governor Geoff Bascand.

“We will consult on the reinstatement of the restrictions we had before Covid, which limited the amount of subprime loans that banks could make.”

Bruce Patten of Loan Market’s mortgage advisers said his business “was already expecting an influx” of people trying to get high LVR loans while they could.

Owen Vaughan, editor of the NZME-owned property site OneRoof.co.nz, said the move would only boost the housing market.

“The Fed announcement basically tells buyers, suppliers and investors: trade before March or the LVRs will hit you,” he said.

Mortgage Lab CEO Rupert Gough also pushed prices up.

He said buyers who were able to get larger home loans as a result of relaxed lending rules were generally able to pay more when buying, which helped drive sales prices.

However, independent economist Tony Alexander cautioned against exaggerating the importance of LVR restrictions.

High LVR loans only accounted for about a fifth of total home loans in recent months.

Consequently, Alexander hoped that once the LVR restrictions were back in place, they would likely only cool down house price growth for a few months.

“I expect the market to slow down during March, April and May and take off again in June,” he said.

Westpac economist Dominick Stephens agreed, saying he hoped the LVR restrictions would “only dampen” growth in house prices.

Historically low interest rates were, instead, the biggest factor driving home prices up.

“Over the past three decades, the biggest contributor to the rise in house prices in New Zealand has been a dramatic change in interest rates, and I think what is happening now is proof of that,” he said.

That made the second announcement from the Reserve Bank yesterday potentially more important.

He confirmed plans to introduce a new tool to stimulate the economy, called Financing for loans.

FLP would effectively offer commercial banks a discounted retail rate, reducing their financing costs and allowing them to lower mortgage rates even further.

That would likely mean more cheap money flows to home buyers.

This apparent contradiction between introducing LVR restrictions that could help cool the housing market while simultaneously pumping cheap money into the economy and driving prices up was criticized by National’s shadow treasurer Andrew Bayly.

“On the one hand, the Reserve Bank is adding fuel to the fire of the housing market with its accommodative monetary policy,” he said.

“And on the other hand, the Reserve Bank is trying to cool down the housing market.”

“The government must pose serious questions to the Reserve Bank and the consistency of its approach.”