Last week the Minister of Finance sent an instruction to the Reserve Bank telling them that from March 1 they must take into account the Government’s goals on house price stability and affordability for first home buyers when making their decisions, and state what impact their decisions will in fact have on housing.
This expands the targets which the Reserve Bank has to try and hit – but with a limited range of weapons. Specifically, the Reserve Bank has to achieve low inflation, high employment, stability in output, interest rates and exchange rates, financial system stability and soundness, and now housing goals.
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At this stage the Reserve Bank has mainly just three tools for doing this. It can change interest rates via the official cash rate, change the loan to value ratio, and change the rules regarding bank capital and funding levels. With house prices rising strongly and data showing 30% of house sales in January were to investors, the Reserve Bank is not delivering the housing market performance the Government wants.
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So, what will they change to flatten prices and shift availability away from investors towards first home buyers?
Already the minimum deposit for investor buyers getting their funds from a registered bank has risen to 40% for new applications, and from May 1 all those with pre-approvals will also need 40%. If housing remains robust heading into winter, a lift to 50% cannot be ruled out – then 60%, if needed, though that is not likely.
Whether the deposit rule shifts or not, the scene is set for borrowers to move away from getting funds from banks, towards non-bank lenders, trust funds, and traditional communities which have long had their own financial systems.
Will the Reserve Bank raise interest rates? After all, record low mortgage rates and term deposit rates explain why investors have dived into housing assets (and shares, and cryptocurrencies, and commercial property) since mid-2020. No.
Interest rates will still be set to influence the overall inflation rate and growth in the economy – not the housing market. On that note though, home buyers and owners should be aware that bank costs for funding fixed rate mortgages have soared in recent weeks as the world outlook improves, worries about a post-pandemic surge in inflation escalate, and markets bet on central banks having to raise rates from next year and not their promised 2024.
Increases in fixed mortgage rates are likely soon, and as ever, I personally remain a fan of the five-year fixed rate at 2.99%.
The Reserve Bank could easily tweak the level of capital banks must hold for lending to investors, so that investors end up paying higher interest rates than owner occupiers. But they are also likely to consider a couple of other tools to achieve the Government’s goals.
The Finance Minister has specifically asked the Reserve Bank to give him advice on how to curtail interest-only lending to investors, and how to apply a Debt to Income (DTI) set of rules only on investors – not owner occupiers.
It seems quite likely that the days of high levels of interest-only lending to investors are going to end. To prepare for this, investors need to start planning for how to start making principal repayments, just in case the rule when it comes is imposed on existing borrowers and not just new ones.
With regard to DTIs, the Reserve Bank has sought power to impose such rules in the past, but each time has been refused ability to use them by the Minister of Finance. But their day may have come and probably not this year but maybe from 2022, investors will find the amount they can borrow across their portfolio restricted by the level of income they enjoy from all sources.
Will these measures have an impact? Yes. It’s just a matter over what time period. Will they cause house prices to fall? Almost certainly not. Neither the Reserve Bank nor Finance Minister wants the recovery in growth threatened by people seeing their main asset fall in price. Plus, late last year the Prime Minister noted (to paraphrase) that there are more votes in house prices going up than down.
Also, because a lot of new construction of dwellings is financed by investors, no actions will be taken which will put this source of growth in new house supply at risk. In fact, the Minister has explicitly instructed the Reserve Bank to target investor buying of “existing housing stock”.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
