Death to the property industry predictable

Government and Reserve Bank talk about capping mortgages to salaries will be a death knell to the property industry.

So whoever came up with the idea to salary cap mortgages should be shot at dawn.

I’m totally surprised this idea has an traction at all. Firstly it’s more desperate than a dateless prom queen but secondly  it’s more dangerous than rising house prices.

A typical household would be blocked from getting a mortgage of more than $405,000 under income-related lending restrictions being considered by the Reserve Bank.

As house prices begin to rise again, the Government is refusing to rule out debt-to-income limits as a potential response to cool the housing market and prevent “a bubble emerging”.

If adopted, the policy would stop people from borrowing too much relative to their income. It is already used in the United Kingdom, where most buyers cannot get a mortgage higher than 4.5 times their annual earnings. But opponents say any such policy would hit first-home buyers hardest, making it even harder for them to attain home ownership.

Debt-to-income limits were raised by the Reserve Bank yesterday after it warned the Government that resurgent house prices were a risk to the economy. Governor Graeme Wheeler said the average house price in Auckland was nine times larger than the average income, making it one of the least affordable metropolitan markets in the developed world.

The bank has raised the idea before, but said yesterday that it was now “seriously considering” the measure.

The fact is that house buyers in NZ predominantly buy with low equity. That’s been a feature for a long time.

That’s not just first home buyers – everyone is stretched.

Property Industry and bank peeps will tell you for free that a salary cap will have a massive effect on house and apartment sales. Do the maths.

A cap will kill sales overnight. No buyers means no sales – and that’s across the board.

It will also place massive risk on housing projects that have been pre sold off the plans.

I can just see the turmoil now – thousands of buyers who have bought off the plans won’t be able to settle apartments and houses at completion…. because they won’t be able to get a loan.

And home owners will be stuck in houses they can’t sell. Too bad if you’ve lost your job and you need to sell the house. You’re gonna take a bath.

The thing is supply has been the issue. There is very little to own and rent. Hence demand causes competition which causes prices to rise. So fix supply.

I’m bewildered. What muppet thinks that making it impossible to get a mortgage will solve the housing issues in Auckland?

Killing off buyers doesn’t reduce the demand. It makes for much bigger problems.

You increase supply stupid!

 

– NZHerald

 


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  • Ghost

    Having a lending structure based on income makes sense in an environment that has always operated that way, wanting to introducing this in our current market is unfathomable. Banks by nature are risk adverse, and wont lend to people who are unable to repay (unless they are regulated to, aka US / Clinton administration #andnothefreemarketdidnotcausetheGFC). Why should it be up to the Reserve Bank to dictate how you want to structure your loan repayment, ie duration or payment commitment. Once again the RB is trying to fiddle with a mechanism that they should not control or influence, as above, it is a supply and demand matter, fix that and the markets will normalize.

    • Chinaman

      I think it is all to do with making the banks ”pull their heads in” and stop irresponsible lending.There are so many dairy farms underwater now because of the money the banks were throwing at them in the ”white gold rush” of a few years ago.

      Banking laws were changed in about 1987 so that banks needed to hold less capital on residential mortgages,so off course they all piled in like ”pigs to a trough” and which led to the property bubbles all around the world since then.

      • Zanyzane

        The banks did not have a choice as the LVR lending restrictions prevented lending against houses. With interest rates set too high by the RBNZ compared to our major trading partners around the world, savings in NZD accelerated. The banks need to lend out this savings in order to maintain their net asset position. Can’t go to housing it goes to more risky commercial businesses. The Reserve Bank is actually creating Bank Instability by holding interest rates too high.

  • Jude

    I can not see how capping lending, based on income is fair.It does not take into account future earning potential.
    As already stated this is a supply and demand situation.
    Increase supply and at the same time stop immigrant settling in those expensive areas in Auckland.
    The property boom in Auckland is not showing so badly anywhere else in New Zealand.

    • Miss McGerkinshaw

      “I can not see how capping lending, based on income is fair.It does not take into account future earning potential.”

      That assumes the earnings will always rise. What if you are made redundant and end up having to take a lower wage, have a long term illness/accident where you only get a portion of your salary (if ACC) or the benefit (if illness and not insured)? I think people believe it’s always going to get better but sometimes it just doesn’t.
      (I got sick and began ‘retirement’ well before planned. Hence a lot of my fiscal plans went out the window. Also my home which was part of my long term plan turned out to be a, if not itself leaky, built in the time frame and of the materials of leaky homes so sold for a lot less than anticipated.) – just sayin

      • Jude

        ok point taken cheers:)

      • MaidenMarewa

        Me too. I was on about $50,000 when I bought my home and then ended up on the dole where the gross income is just under $15,000. I am back to that hourly rate (8 years later) but only getting 20 hours. You need to consider the worst case scenario as it can happen.

  • Ross15

    When we got a mortgage years ago and when renewing to buy other houses we always had to fill out a form which outlined out household income and major expenses. It was a requirement the bank to show we could service the mortgage. ( Had nothing to do with RB requirements). So when I read this I wondered when things changed or what has changed.
    Or am I misunderstanding the issue ?

    • geoff2112

      Its hasn’t changed….the Bank won’t lend to you if you can’t afford it….

      • Ross15

        Thanks Geoff –so what is the issue , except for the RB “formalising” what banks already do? (NB. I don’t think the RB should have anything to do with it)

        • one for the road

          Some people misrepresent their income and xpenses to the bank, ie they know how to play the game. All the RB would be doing is tightening the rules so banks and borrowers cannt fiddle.

          • Ross15

            So if they did do something along the lines being talked about it is not going to affect the market that much.
            I still say the RB shouldn’t be involved –the risk is on the bank and if they mismanage the risk that is their problem.( if a few dozen people default then the bank has to take it on the chin if the debt/equity ratio has been fiddled or has got out of hand)
            The RB’s role is at the macro level , not the micro level.

          • one for the road

            True,but many micro problems can add up to a big macro level one, hence the prudential oversight… At the moment there is no firm debt/income ratio mandated by the RBNZ, so this would help sort it..

      • one for the road

        Sometimes they do lend, perhaps at a higher security or deposit, or perhapswith a higher interest rate, but they take risks if the income / debt ratio is significantly broken..

  • localnews

    that wont kill off the property market, but it will kill off the first home buyers market.
    It seems surprising that they would target that segment. I would suspect the expensive part of the Auckland housing market is full of people without big mortgages. If you have been in the market for 20 years it makes no difference to you that you cant get a massive mortgage

    • Miguel

      I suspect the impact would stretch beyond the first-buyers market. After all, those first houses are sold by someone moving up to a larger/better second house, and so-on. The domino effect could be quite profound….

      • localnews

        perhaps, but the only reason put forward for the Auckland housing market being bad, is that first home buyers cant get in. Introducing measures to make it doubly hard for them to enter seems counter-intuitive

  • Bazza63

    Imagine your house is worth $800,000 & the new rules come in & you want sell it. The person who buys it on 10% deposit will need a combined income of $160,000 & $80,000 deposit. So very few Kiwi’s will be able to do this & therefore driving house prices down. Lets say all houses drop by 20% value, then the banks are going to come knocking on the door of everyone currently on a 70% or greater mortgage & tell them to find enough cash to bring their mortgage loan down to 90% of the new value. So lets say you currently have a $640,000 mortgage (80% of original $800k), the house is now worth $640k & you are back to 100% mortgage. To get back to 90% you are going to have to find $64,000.

    • Miguel

      10% deposit? You jest – 20% is the price to play these days. A few can get away with 10% deposits, but that’s been capped, too.

      • Bazza63

        Then that makes the scenario worse.

      • Grendel_from_the_dead

        its not that hard to get a 10% deposit mortgage, and if you were on a combined income of 160K with an 80K deposit, a 720K mortgage would be easy for a lender to say yes to.

        In fact i have a couple similar on the go for clients at the moment.

        Its the people with 80K income trying to get a 300K house with a 10% deposit that have it harder, but even then its just about timing and presenting your situaiton well (which is what a good adviser does).

  • Miguel

    I can see both sides here. The Reserve Bank is charged with maintaining financial stability, and if banks are continuing to lend large sums to stretched house-buyers, there is increased risk to the banking sector in the event of a shock to interest rates or employment, or whatever.

    Banks do assess your “uncommitted monthly income (UMI)” (ie. what’s left after housing costs, HPs, etc), and also ‘stress test’ your borrowing ability by seeing if you could afford the repayment were interest rates to increase. Thing is, these aren’t terribly robust checks. The higher interest rate is all of 7% or so – not the 9-10% rates actually hit only a few years ago. Ditto the UMI – this could be as low as a few hundred dollars a month and be considered OK. Hardly enough to cover a surprise car repair.
    Banks need to be careful lenders, certainly, but when the music is playing, they all dance, because shareholders will punish banks who don’t keep up with the lending activity of other banks in the markets. NZ banks took some hits in the GFC for making loans that _they must have known_ were marginal. But they made the loans nonetheless, because if they didn’t, someone else would to take market share. Someone else has to slow the banks down because they won’t do it themselves.

  • cows4me

    It’s all good, the RB will force the young from the world’s most livable city ( haha that always cracks me up ) out into the provinces. Send us your young professionals and workers and you can keep all the indebted slaves.

  • JeffDaRef

    I dont agree with your thoughts on outcome – the market will barely miss a beat as there are still plenty of people (of all income levels) needing a house – all this will do is to push first-home buyers further out of the market and ensure “rick pricks” are the only ones in a position to buy the houses…stupid solution to an overstated problem.

    Then again, its not a bad thing – who ever said first home buyers should be looking to buy in an inner suburb with a $50k deposit?? The system isnt broken, the expectations are.
    See yesterday’s NZH story of the young fella who saved his backside off and bought a modest house in an outlying suburb – same kind of first home everyone has had, up until this current generation…

  • Gladwin

    Sure we need a greater supply but in the meantime what to do?

    Whatever it is needs to be gradual while cooling the market. I’m sure they’ll come up with something sensible.

    In Oz one of the banks has refused to loan to foreign buyers.

    • Cadwallader

      The OZ bank you refer to has a ridiculous rule but it is easy to circumvent. Just have your lawyer set-up a local trust with a local person as the sole trustee. The beneficiaries can be anywhere in the world.

      • one for the road

        That is how most smart people operate their trust if they are looking for anonymity.

  • one for the road

    Banks lending rules are quite well known- in summary, in order for the the borrower not to exceed their ability to repay, the debt /income ratio shouldnt really be more than 35% of gross income (with debt defined as all debts – student loans, credit cards balances, car hire purchase, etc)

    So if the combine income of the borrowers is say $100k gross, then the max. amount of debt they could safely service would be $35k p.a. – at mortgage rates of 5% (to keep the maths in this example simple) that would equate to a loan of $700k which would be a mutliple of 7.

    But what if they already had exisitng loans and debts – ie a student loan, personal loan for a car and credit cards – which many people first home buyers have today. Then the bank would reduce the amount of available income available to service a home loan… Perhaps down to a multiple of 4-6 times as a maximum.

    Also, what if situtations change – unemployment, rising home loans rates, etc

    So having a multiple of say. 4-5 times is not without precent and would be very prudent…

  • The other Neil

    Seems to me it will just drive rents up as people who would buy a first house are forced to rent for longer.

  • Bombastic

    Of course supply is the solution, property doesn’t evade that law of economics. I’m going to swim against the tide on debt/income limits, but only for one reason. They manage the risk of an aggregation of loans going sub-prime. Lenders should be doing that anyway, but they’re banking on the economy trucking along, and the security always being worth more than the loan. Either or both of those slipping into reverse, then there’s trouble.

  • Cadwallader

    How will this short term thinking work? The market is responding to the reality that lots of new people have flattered us all by choosing NZ as their new homeland. And that’s a bad thing?
    The supply problems will resolve themselves eventually and it is good to see central government about to lean on local authorities to free up more land and not use the RMA as an impediment to development. After 25 years my take on the RMA is that it ought be repealed and its stated objectives left to the Courts to interpret and enforce.

  • Somnambulist

    No matter what the issue, or what the solution, there is rarely a better strategy than to let the market sort itself out. Whenever governments step in to fix something they invariably seem to make things much worse.

    • Whitey

      Reagan was right on the money when he said the most frightening words in the English language are “I’m from the government and I’m here to help”.

  • Keanne Lawrence

    At best this will only dampen down the market as opposed to having any significant detrimental effect on sales.
    Nothing so far has any impact on getting the housing market in Auckland to pick up the pace of new dwellings and while an inept council continue do no more than plan to have another meeting about a plan the bad plays on.
    NZ is a very small fish in a very big pond and while many pay attention when the Governor of The Reserve Bank adjusts the OCR they bypass a lot of other details he provides for us. The global economic outlook is that pressure is increasing on many countries still struggling to get anywhere near an even keel leaving them sailing in circles. Since they all circle in different directions it is creating a storm of opposing waves.
    Most recessions or deviations in the international monetary situation have been the outcome of too much easy money. The risks is the same for over financed home buyers, all be it on a smaller scale, who will feel the extreme pressure of increasing interest rates on their disposable income.
    There is no silver bullet but the need to speed up the volume of houses coming onto the market in Auckland continues to increase in relation to the failure to facilitate this by a dead beat administration under Loose Lenny.

  • MaryLou

    In some ways I’m a wee bit in favour of something like this. But then, I’m as fiscally conservative as they come. The old idea of spending 30% of your income on housing appeals greatly, and when you look at the outcome of banks lending to people in the US that really should never have gotten mortgages, well…

    I can’t disagree with anything in the article though. So maybe rather than whacking a whopping great cap on it in one hit, maybe a reducing cap over a period of 5 years or something.

    Edit to add: coupled with increasing supply.

    • Miss McGerkinshaw

      I think of the increase in mortgagee sales when interest rates rise and can’t help but think this isn’t such a bad idea.
      People get ‘hurt’ either side of the ideology – either can’t buy or overcapitalise and it all goes pear shaped when interest rates rise or jobs get lost.

    • Doug

      It is a touch on the late side for this… Now it will lock people out of the market. If anything this could cause a pricing collapse

  • rua kenana

    So, increase, and ever increase, “supply” (i.e. production) to try to keep up with world demand for low cost NZ houses.
    Well, I guess dreams are free, but the cost of implementing these ones very much less so.

  • BR

    When I bought my first house the bank required a 20% deposit and proof of earnings over the previous 12 months, for obvious reasons.

    Bill.

  • GMAK

    Having worked in banking for a number of years I know there will be ways around this. Currently there is ample lending going on with guarantees taken to sure up equity. The banks will now just add parents to loans to add income or Parents will borrow money and “gift” it to the kids. Problem solved and the status quo continues.

    • shykiwibloke

      Yep. Form a company $50, job done. Trusts would also be another vehicle to pursue (dare I mention that over-used word of late?

      • Zanyzane

        $160 these days to form a company.

  • Abjv

    The problem is the banks lending too easily where the borrowers finance does not stack up i.e. too high a portion of take-home being spent on the mortgage so there is no safety margin in the event interest rates go up or there is a hiatus in income. The banks don’t care, as they can always foreclose/sell and get their money back. If they have lent too high a percentage, so there is a risk a forced sale wont cover costs, they just take out mortgage repayment insurance on the loan and charge the premium to the borrower.

    You only bring this under control by increase in supply (so buyers don’t have to bid as high to get a house) or by having a structure where the banks also take a haircut if they have to foreclose. A partnership (if you like) in the house, with gains/losses shared, and the owner gradually buying the bank out. Different model to using the house as security for a loan where the bank’s butt is almost always completely covered.

    Cut down the reckless lending. Someone going to a high percentage on last year’s gross income is not necessarily being reckless. They may just be self employed.

    • Zanyzane

      Banks are much tighter these days compared to 2004 to 2007 when Low Documentation loans was very popular with banks and brokers. Just let the bank know your income was $350k and they accept it as your income on low documentation loans.

  • JeffDaRef

    Exactly – and who says you have to live in it either?
    Get a house in an appreciating area, bank a bit of capital gain, then buy in Auckland a few years down the track when you’re in a better financial position.
    Every extra dollar (either saved or via capital gain) is worth x5 in terms of buying power under the current 20% deposit rules.

  • Keyser Soze

    Rents will go through the roof! Can’t buy a house? Forced to rent? You, along with a huge chunk of middle/lower NZ will be forced to pay whatever current landlords demand.

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