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New Zealand’s central bank will reinstate mortgage lending restrictions next month, with further restrictions to come for property investors, in a bid to curb the nation’s surging house prices.
The Reserve Bank of New Zealand will tighten loan-to-value restrictions on mortgage lending, with the tightest restrictions to be imposed on property investors, who won’t be able to borrow more than 60% of a property’s value as of 1 May.
However, some economists have flagged that the bank’s decision might not have its desired impact on the housing market. Capital Economics estimates that the new restrictions will reduce the volume of sales by no more than 10 per cent, which would still be consistent with strong house price growth.
Nationally, CoreLogic data shows property values continued to grow over the month of January up by 2.2 per cent, lifting 12-month house price growth by 12.8 per cent. Corelogic data shows Auckland’s annual growth rate at 11 per cent, its fastest pace since early 2017. Outside the main centres, the North Island’s east coast town of Gisborne recorded 29.4 per cent annual growth, and Whanganui 25.7 per cent growth, Corelogic’s House Price Index for January shows.
| Average Value | Annual | Quarter | Month | |
|---|---|---|---|---|
| Auckland | $1,164,440 | 11% | 6.5% | 1.9% |
| Hamilton | $693,826 | 12.6% | 6.9% | 2.9% |
| Tauranga | $888,930 | 15.5% | 10.6% | 1.5% |
| Wellington | $878,861 | 16.2% | 8.4% | 2% |
| Christchurc | $556,446 | 9% | 5.8% | 3.1% |
| Dunedin | $592,652 | 12.4% | 6.9% | 1.8% |
New Zealand’s housing lending restrictions were lifted in April last year shortly after Covid hit. This resulted in the housing market’s rapid acceleration, followed by a flurry of new median house price records.
Under the RBNZ’s lending changes, most owner-occupiers will require a 20 per cent deposit, and from 1 May property investors will need 40 per cent deposits.
“We are now concerned about the risk a sharp correction in the housing market poses for financial stability,” Reserve Bank deputy governor Geoff Bascand said in a statement on Tuesday. “There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged.”
The loan-to-value restrictions do not apply to new residential construction.
Bascand added that highly leveraged property owners, in particular property investors, are more prone to rapid-fire sales that potentially amplify any downturn.
“A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt.”
Australia and New Zealand Economist Ben Udy of Capital Economics says the impact of loan-to-value restrictions on the housing market has been mixed in the past.
“And we estimate that the restrictions will reduce the volume of sales by no more than 10 per cent, which would still be consistent with strong price growth,” Udy said. “As such, we doubt the restrictions will be enough to cool the red hot housing market.”
New Zealand’s homeownership rates are at their lowest since the 1950s, according to the 2018 Census, falling to 64.5 per cent of households.
REINZ chief executive Bindi Norwell says Auckland City remains the most expensive district in the country, with the city reaching a new record median house price of $1.2 million in December 2020. Additionally, 11 regions and 27 districts also saw record-high median prices at the end of last year.
“We have half the inventory levels we had back in December 2018. Therefore, there just isn’t enough choice for people looking to purchase which has meant that there is significant pressure being placed on house prices in most parts of the country,” Norwell said. “When you add into the equation the fact that there are record low-interest rates, it means that people are more willing to compete to secure the property they want.”
Udy says this strength in the housing market is one reason why it expects the central bank to tighten policy this year.
“Bond yields have risen sharply over the last week as markets have come around to that view,” Udy said.
“And given our expectation of higher bond yields in the US, we now expect 10-year bond yields in New Zealand to rise from 1.32 per cent now to 2 per cent by end-2022. By contrast, Australian yields may only edge up from 1.18 per cent now to 1.5 per cent by end-2022.”
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