Last week the Reserve Bank loosened its grip on bank lending, making it a little easier for low deposit house buyers.
Acting Reserve Bank Governor, Grant Spencer, said, “LVR (Loan Value Ratio) policies have been in place since 2013 to address financial stability risks arising from rapid house price inflation and increasing household debt. These policies have helped improve banking system resilience by substantially reducing the share of high-LVR loans. Over the past six months, pressures in the housing market have continued to moderate due to the tightening of LVR restrictions in October 2016, a more general firming of bank lending standards and an increase in mortgage interest rates in early 2017...Housing market policies announced by the Government are also expected to have a dampening effect on the housing market."
From 1 January, the LVR restrictions will require that:
- No more than 15 percent (currently 10 percent) of each bank’s new mortgage lending to owner occupiers can be at LVRs of more than 80 percent, and
- No more than 5 percent of each bank’s new mortgage lending to residential property investors can be at LVRs of more than 65 percent (currently 60 percent).
In its typically measured style, the Bank is taking a slow and caution approach to relaxing the controls, saying it will "reduce the risk of resurgence in the housing market or deterioration in lending standards."
The Bank's move mirrors a slowdown in the housing market. The Governor said "We don't see a collapse of house prices as a particularly high risk, so we're not acting because we see things are about to fall off a cliff".
I doubt that the change will in itself affect the market. A greater influence will be what happens in the Beehive building across the road, and more will be revealed on the 14th of December when the new government releases a mini budget. Issues likely to be addressed in that mini budget (and probably passed through Parliament under urgency) are foreign ownership and forestry.
Last week Associate Finance Minister David Parker released a Ministerial Directive setting tough new conditions for foreigners seeking to buy farmland in excess of five hectares. The directive was in the form of a letter to the Overseas Investment Office (OIO) setting out the Government’s policy approach to overseas investment in rural land. Although the directive does not come into effect until 15 December - a day after the mini budget - all applications currently being processed will have to abide by the new rules.
To gain approval from the OIO an applicant will need to demonstrate they intend to add value to the New Zealand economy. This is likely to be in the context of new jobs, new technology and business skills, and increased exports.
The Directive said, “The existing directive is too loose…It only applied to very large farms more than 10 times the average farm size. In practice this meant restrictions in sales generally applied to sheep and beef farms over 7,146 ha or a dairy farm more than 1,987ha."
Although the Directive refers to "farm land" it clearly relates to all non-urban land. That raises a big question mark over demand for lifestyle property, and the impact it will have on regions like Northland which are popular with overseas buyers. Most lifestyle properties will not have "added value" potential, and may struggle to overcome the threshold for approval. All eyes will be on real estate companies specialising in lifestyle property, especially coastal land, to see what impact the new rules will have on demand and values. I expect there will be a noticeable impact on both demand and coastal land values.
Forestry has been specifically excluded from the Directive. Details are expected to be announced in the mini budget but are likely to revolve around requirements for overseas owners to establish wood processing facilities. It seems this initiative is part of the regional development plan being led by NZ First Minister Shane Jones.
A press release from David Parker said the Directive Letter is the first step in strengthening the overseas investment regime. It is expected that existing residential houses will also be classed as "sensitive land" and require OIO approval. While this is not an outright ban of overseas house buyers, it is likely to have the effect of being a total ban as most are unlikely to meet the adding value criteria.
Frank Newman writes a weekly article for Property Plus.