Reserve Bank Macro-Prudential Tools

[Viking]

Recommended Reading.

Ravings by Rodney

*The implications of Governor Wheeler's experiments for the housing
market, borrowers and others*

The following link will take you to the latest Raving –

http://www.sra.co.nz/pdf/GovernorWheelerMar15.pdf

[Perry]

Interesting quote (for me):

Forcing banks to discriminate against investors because overseas evidence during major housing collapses
has shown they have a higher default rate than owner-occupiers looks like being extremely reactionary to
overseas events of potentially minimal relevance to the NZ prospects.

[Damap]

You mean increases in last 12 months Perry? I averaged at $50 increase across rents ranging from $310 to $500. So that is about 15% I guess. Some on mine had been stagnant for a bit before that.

[Perry]

Somewhat at odds with the
fantasy CPI of 2.2%, then.

[Wayne]

Once the rules are known, it will be interesting to see if much debt is restructured back to an investor's PPOR.

Why would you do that?
At the moment you get a tax deduction for the investment mortgage so can 'afford' a 30% higher rate before you break even with a PPOR mortgage.
I doubt that investment mortgages will go up that much.

[Wayne]

Free market had nothing at all to do with the GFC. It was the Wall ST. product development nothing to do with real estate or a free market.

So nothing to do with lack of rules and oversight?
I didn't say it was to do with real estate
but it was a very free market with few, if any, rules and oversight.

[speights boy]

Why would you do that?

Investor debt/income ratios; or investor LVR restrictions.

[Wayne]

Investor debt/income ratios; or investor LVR restrictions.

Yeah
You would have to be careful with the numbers.
You are giving up a lot of deductability.
All very much depends on the rules which aren't set yet.

[speights boy]

You are giving up a lot of deductability.

No choice if you are in breach of a ratio.

[chrisgoh]

So nothing to do with lack of rules and oversight?
I didn't say it was to do with real estate
but it was a very free market with few, if any, rules and oversight.

The root cause is not free market, but fraudulent act on the part of Lehman and other financial institutions who mislead investors about their true liquidity position of complex real estate backed commercial paper via accounting engineering.

[chrisgoh]

No amount of rules and regulations can prevent fraudulent behaviour.

Free market form the basis of property cycle. Any market intervention will derail the curves, which is unsustainable in long term.

[speights boy]

Free market form the basis of property cycle. Any market intervention will derail the curves, which is unsustainable in long term.

Do you believe the banking industry should be subject to regulation in regards to such things as capital required, risk weightings and lending criteria ?

[Perry]

RBNZ Independence

More to do with interest rates, perhaps, but a megaphone overture can have mortgaged tones.

Labour leader Andrew Little has criticised Prime Minister John Key for
using "megaphone diplomacy" with his warning to the Reserve Bank over
interest rates. Key warned the bank on Monday not to keep interest
rates unjustifiably high when it reviews the official cash rate on
Thursday, because inflation was heading lower.

Little said on Tuesday that he did not want to interfere in what
Graeme Wheeler did as the independent central bank governor. "I think
it's wrong for senior politicians to be trying to use megaphone
diplomacy to advise the Reserve Bank governor on what to do," Little
said. "It's not the way the system works at the moment."

[donthatetheplayer]

So it's sounding like we may get stung with a 0.50% (+/-) interest rate premium for loans on IP's. How would this work in practice? Would the bank send a note saying "you are now paying 0.50% above the rate we agreed with you"?

I just paid a break fee to go from 5.99% to 5.39% so would my rate now go back up to 5.89%? Lol. What a circus.

I'm not even going to waste brain power thinking about changing my strategy. No new mags for the boat trailer this year I guess. Boo hoo.

[MikeO]

Interesting discussion. Might be stating the obvious to some but a key misconception about all this that seems to crop up is that the RBNZ is trying to do something about the property market.

This is not the case (unless you are a conspiracy theorist). The goal is to address a perceived threat to the banking system. E.g. there is a shock to the property market leaving a whole lot of property investors with negative equity. End result being default on mortgages due to either bankruptcy or recievership of companies or trusts (which will most likely be much more common for investors). Banks end up carrying the can.

So on that basis I actually think the proposals are justified.

There will be winners and losers though including:
losers - highly leveraged investors who will likely be hit with higher lending costs and concievably higher LVR requirements forcing them to sell, renters who will most likely end up paying higher rents short term and much higher rents long term due to reduced supply

winners - investers with a lot of equity who can pick up some good deals in a firesale and enjoy higher rents and/or who can source finance outside the NZ banking system...

Bottom line the little guy will get another kicking from this but that isn't a reason not to do it. There is a bubble in Auckland and something will give sooner or later.