The RBNZ has introduced a number of prudential tools designed to take the heat out of the housing market. Most commentators have been cynical and continue to talk the market up. I’m not sure. The biggest change is the restriction on loan to value ratios over 80%.
Over the course of 2013 this has been as much as 30% of new bank lending and needs to reduce to 10%. Once exempt loans are removed (refinances and Welcome Home Loans) the current level is about 20%, so it needs to reduce by 50% to 10% of overall new lending. However, the Reserve Bank has made adherence to the 10% rule a requirement for a banking license. This makes a breach of the LVR rule a serious offence. Banks will therefore want to undershoot and play it safe. Whilst the rule is 10%, banks are likely to aim for 7%-8%. That means over 80% lending will need to reduce by 60%. Sure there will be workarounds, but there were workarounds in 2009 and 2010 during the GFC as well. This was the last time we saw similar credit rules and, if anything, the rules are tighter now.
Of bigger concern is the uncertainty the rules will create. For banks, the 10% is measured over a six-month moving average. If a lender has a small month coming off its moving average, it needs a small month going on. Lenders also need to allow for seasonality and guess how much of what they approve will actually settle. All of this means they will have to pay very close attention to their pipeline, something they are not used to doing. We are already seeing policy changes triggered by this uncertainty. Banks are not doing blanket pre-approvals above 80%. Above 80% any finance is on a case-by-case basis. Any pre-approvals above 80% will either be property specific or have a shorter expiry of two months (instead of the usual six months.) Even with existing pre-approvals there is limited flexibility above 80%.
We have had clients approved at 90% where the bank will only honour the pre-approval for the exact amount. Forget asking for an extra $10,000 if you get a bit carried away at auction! As these pre-approvals expire and are replaced it will be with a weak, heavily caveated approval including a condition that the bank has enough capacity to provide the loan. Welcome to the Clayton approval, not worth the paper its printed on. This last bit is dangerous. Common sense has gone out the door at least in the short term.
It’s the classic dumb behaviour we come to expect from banks when they are in “knee-jerk” mode. It means buyers need to be a lot more careful when buying, especially unconditionally at auction. Before the rule changes we always had back up options. Not anymore. Reducing competition at auction, putting more emphasis around registered valuations, and taking so many first homebuyers out of the market will impact on prices in some areas. This change will not be obvious for a while yet. Pre-approvals last up to 6 months so I think we’ll see another 2-3 months of manic buying before the number of buyers in the market starts to drop off quickly. By February all buyers will be under the new rules and I think we’ll see those rules start to bite. Unfortunately this will happen around the same time, as the Reserve Bank looks likely to put a rate increase through. I don't think we are going to see ongoing rate increase but we might see one or two sneak through next year if the housing market stays hot and doesn't slow down as much as I expect.