OPINION: Back in 1945 Australian Warrant Officer Norris Mervyn Bird coined the term "cargo cult" to describe the practice of incorrectly ascribing something to a particular (wrong) cause. In this instance it described the belief, by Melanesian tribesmen, that the planes landing and dropping supplies in Papua during the World War Two were actually gods deserving of worship. That may seem quaint now, but it’s a perfectly understandable response given that flying machines were outside of the frame of reference of the Papuans at the time, so they naturally looked to understand what was happening in terms and concepts that made sense to them.
And lest we feel too superior it’s worth noting that we, in the 21st century, still attribute events to incorrect causes and I could fill volumes with examples of beliefs that we hold which attempt to explain why things happen in a particular way – but which are simply wrong.
One such example of the latter is the way in which the New Zealand housing market has developed its own distinct mythology over the decades and how various market developments have been ascribed to causes which were not, in fact, responsible for the outcomes being attributed to them.
Recent examples of this would be the powerful beliefs, at different times, that house price growth in New Zealand was caused by foreign buyers, property investors and even ghost homes. None of these things was actually directly responsible for the growth in house prices – but all of them attracted large followings of believers at different times.
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And we can now add one more to that list: the belief that the loan to value ratio restrictions have kept the property market stable since 2013 and that, had they not been in place, property Armageddon would have been upon us.
The claim is nonsense but refuses to die, and I’m saddened to see that some commentators are now openly questioning whether the banks will be responsible now that the Reserve Bank is no longer mandating a minimum deposit for owner occupied and investment properties. This infers that the property market was somehow less stable prior to the imposition of the restrictions in 2013 and that the banks were running riot in their lending practices prior to that time.
Both suggestions are insulting and lack historical perspective. Here’s the reality:
1. The LVRs did not bring stability to the market
After initially claiming that the purpose of the LVRs was to cool the market the Reserve Bank changed its narrative a few years ago and claimed, instead, that the restrictions were really about market stability and the risk of a crash if house prices got too high. This sounded comforting, but it was nonsense. The New Zealand property market has actually been remarkably consistent for almost 40 years and needed no help from the Reserve Bank to maintain that stability. Since 1980, the only time we’ve experienced anything even remotely resembling a crash was in 2008, following the GFC, when prices bottomed out 8.6 percent below the market peak, before quickly recovering and taking off again.
2. The banks were (and are) putting their own money at risk
Prior to 2013, as now, the banks had far more to lose than the Reserve Bank. They were putting their own (or at least their depositors) money on the line and the consequences of making a mistake could have been disastrous – so the idea that they were handing out money willy nilly is simply wrong. The exception to this would be the no deposit investor loans which appeared toward the end of the last boom – but even these were mostly backed by security in the form of equity in an investor’s property portfolio.
3. The banks will be cautious because of Covid-19
Rather than rushing in to offer low deposit loans the banks are currently sitting back and taking a wait and see approach to the market so as to see what happens to property values over the next two or three months before making any deposit decisions. This is a responsible strategy and in keeping with what we’ve seen in the past.
Will we see a return to deposits as low as five percent? Perhaps, but it won’t be for a while and, if we do, it will be because banks are confident in the stability of house prices and the credit worthiness of their clients. When, and if, this happens it will be good news for thousands of Kiwis with good jobs and solid incomes who were previously locked out of the market by a short-sighted policy and for whom home ownership will, once again, be a realistic aspiration.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
