Would NZ house prices go nuts again if we took off all the brakes?

The Government and the Reserve Bank have put in place a variety of handbrakes to contain the housing market since Covid arrived.

The measures were designed to cool what soon became a frenetic market, some of them with an eye on helping first home buyers seen to be shut out in face of super-charged price hikes.

Despite a variety of tools in use, however, experts spoken to by OneRoof say even if all of them were removed overnight not a lot would change.

That’s because the main driver of the market is interest rates.

When rates were super low in 2020 and 2021, a FOMO buying frenzy erupted but now they are rising high the frenzy has cooled and prices are dropping.

Among the tools in use are LVR (loan-to-value-ratio) restrictions, which restrict how much a bank can lend on a property purchase.

The restrictions were taken off in 2020 after Covid but put back in March, 2021, then tightened. Current levels mean investors mostly require a 40% deposit while owner-occupiers on the whole need a 20% deposit.

Other measures include changes to the Brightline test, which is similar to a Capital Gains Tax. It applies on properties sold within a five-year period from the end of March, 2021, and within 10 years for other properties, with some new builds excluded.

Landlords were hit with changes to tax deductibility rules, with a phased-out system removing the ability to claim a deduction on the interest they pay, and prior to Covid, in 2018, the Government also introduced the foreign buyer ban to take heat out of the market.

The experts say the ban impacts mainly the top end of the market and has had little impact otherwise.

James Wilson, head of valuations for OneRoof’s data partner Valocity, says when it comes to LVRs, New Zealand’s banks have historically acted prudently anyway – taking LVRs off won’t mean banks will suddenly lend 95% or higher.

A deposit requirement is “kind of ingrained” in the way Kiwi banks do residential lending, he says.

“While it might be easy to say all of these market constraints, or rules and regulations, directly shape the market the behaviour of the banking sector in New Zealand – and Australasia for that matter, because they’re Aussie-owned banks for the most – it’s already prudent.”

Reserve Bank of New Zealand governor Adrian Orr has signalled that further rate rises are on the cards. Photo / Getty Images

The core business of a bank is not to lose money: “Having that deposit buffer is something they are inherently motivated to achieve anyway.”

Even after the GFC New Zealand’s banking system was not as exposed as other markets, such as in America, because of the prudency of the local sector, Wilson says.

Gareth Kiernan, chief forecaster and director of Infometrics, says the LVR restrictions are impacting probably mainly first home buyers constrained by deposit requirements.

Without the LVRs these buyers may be able to get low deposit mortgages, whereas currently they still have to find $100,000 or $150,000 for a deposit which is a fair amount of saving, Kiernan says.

“If you’re only needing a 5% deposit, that’s a lot less money you have to come up with.”

But even without the restrictions, the banks’ exposure on a 5% deposit is still much higher than lending on a 20% deposit so something they would be wary of.

Kelvin Davidson, chief economist for CoreLogic, says in a more normal world, removing LVRs would likely result in more housing demand and thus higher house prices, but in the current environment he is not convinced taking them away would bring the downturn to an end.

He, too, says even if the Reserve Bank removed them the banks would likely retain a cautious attitude: “They’re a commercial operation, they don’t want to take too many risks.”

But borrowers, too, are cautious because interest rates are so much higher, he says.

“While LVRs matter, they may feel they can’t borrow as much relative to their income because they can’t afford it.”

None of current tools would make any difference to the high interest rate, high inflation scenario we currently have, Davidson says, and with house prices forecast to ultimately fall by 20% even if removing all the measures meant they fell by perhaps 18% other than a possibly shallower house price fall there probably would not be much impact, Davidson says.

Something Wilson says could have an impact is the introduction of DTIs (debt-to-income ratios) which the Reserve Bank has as part of its toolkit to use but which have not been mandated as yet.

DTIs are a blunt instrument and Wilson thinks the bank would be wary of rolling them out.

Valocity head of valuations James Wilson says debt to income ratios could if implemented bring prices down further. Photo / Fiona Goodall

Kiernan doesn’t see DTIs as being particularly binding constraints given where interest rates are at and going in 2023.

“If you’ve got mortgage rates of 8% then there’s only so much debt that can be serviced within that income so that sort of servicing ability is already fairly constrained.

“I don’t imagine banks are going to look at you and go, well, ‘you’re taking on a huge amount of debt relative to your income, we’re happy to do that.’”

Those spoken to all agreed the foreign buyer ban had resulted in little impact, with Wilson saying the overwhelming majority of housing stock in New Zealand transacts among New Zealand citizens or residents anyway.

Davidson agrees foreign buyers weren’t that big a deal before the ban and says they are still not a big deal.

“For me, nothing’s really changed. It might have taken out some activity in some posh suburbs but if you look at the numbers they were pretty low before the ban and they’re pretty low now.”

Wilson says there could be localised impacts from some policies being removed. If, for example, the ability of investors to offset interest was retained it would likely encourage some investors to make their next purchase.

But even so, it would be unlikely to spark the market back into FOMO given supply and demand issues and the higher interest rates.

He says the Brightline test has not had enough time to see whether there has been widespread impact, but Wilson points out New Zealanders are not really a nation of housing speculators anyway so for most people the test would not apply.

“We don’t all buy a house and then in two years flip it on. Most people, owner-occupiers and investors for that matter, are buying with a longer-term mentality.”

Wilson also says the property market works to a cycle and it’s interesting to see how little impact all the “tinkering” has on the big picture.

And Kiernan pointed out that with exemptions to the tax deductibility and Brightline rules in the new housing sphere, removing those rules might undermine demand in the near term for new housing.

Ironically, that could lead to an even more drastic fall in terms of residential construction activity, he says.