TREASURY SAYS RESERVE BANK IS MAKING IT HARDER FOR FIRST HOME BUYERS IN AUCKLAND
By Richard Harman (author)
Treasury says the Reserve Bank’s loan to value ratio restrictions have made it harder for first home buyers to enter the market in Auckland.
Instead they say their place is being taken by property investors.
Papers released under the Official Information Act give an insight into how the Treasury has been arguing that the Reserve Bank’s moves to control the Auckland housing market are not all based on evidence and could have unintended consequences.
Reading between the lines of carefully crafted Treasury language it is clear that its officials are sceptical about the Reserve Bank’s initiatives.
The Treasury comments came after the Reserve Bank issued a Consultation Document in June proposing to tighten up lending for houses in Auckland.
It proposed doing this by raising its so-called speed limits which restrict the total amount banks could lend when the house buyer has a low deposit relative to the value of the house. This is called the loan to value ratio. (LVR)
The Bank was proposing that it restrict property investment residential mortgage loans in the Auckland region at LVRs of greater than 70 percent to two percent of all bank mortgage lending in Auckland.
For non-investment property lending it was proposing to maintain an existing restriction to 10% of all mortgage lending when the purchaser had a deposit of less than 20%.
But plainly the Treasury was miffed that the Reserve Bank had not involved it in the development of the new speed limits.
“In the Treasury’s view, the delivery of the RBNZ’s financial stability mandate and effective use of macro prudential tools will be more effective and better understood when the RBNZ coordinates with the Treasury to ensure overall coherence in the signals that are sent to the market,” says the document.
It gets more direct.
It asks: “Does the level of house prices and their rate of increase in Auckland present a risk for financial stability?”
And it answers the question by saying: “The consultation document also notes that prices are “stretched”. We are not clear what this means – whether this refers to strong demand pressures, or to frothiness and ‘bubble’ dynamics based on expectations – and how much this represents expectations of future price rises.
“The consultation document problem definition does not refer to the magnitude of the effect of the Auckland situation or of investor activity in Auckland on the stability or efficiency of the financial system.”
Treasury argues that the Bank’s argument that Auckland property investors are accepting very low returns because they keep expect capital gains is “logical”
But then the Treasury document goes on to say: “Whilst rental yields may be low relative to house prices, they don’t look out of line relative to other asset markets over the medium term.”
Treasury is not convinced that investors overall pose a threat to financial stability.
It says: “The RBNZ consultation document could be clearer on the magnitude of the problem that investors pose and how this might impact on the banking system, for example the potential loss given default from the investor sector. “
It does on: “We would like to encourage the RBNZ to continue to work on the relative stability risks of investors to add to the evidence base.
“This could include more analysis of international experiences, including identifying similarities and differences to New Zealand’s situation.”
But then Treasury accuses the Bank of making it more difficult for first home buyers.
“Treasury also notes that the growth of investors amongst Auckland mortgage holders could be a result of removing a proportion of first time buyers from the market, intensifying the concentration of a risky set of borrowers.
“This may be an unintended consequence of the 2013 LVR policy settings, underlining the importance of carefully considering the potential impacts of any change to policy.”
This whole document seems to accuse the Reserve Bank of basing its LVRs on inadequate analysis.
What it reflects is the subtle rivalry across the Terrace between the Bank and Treasury.
That Treasury has chosen to release its own assessment of the Bank under the OIA indicates that it is keen to stoke that rivalry in the public arena.