realestate

New Zealand reimposes lending curbs over housing bubble fears


New Zealand’s central bank will reimpose mortgage lending restrictions from March amid concerns historically low interest rates are creating a housing bubble in the country.

It follows an intervention by the newly elected Labour government, which wrote to the governor of the Reserve Bank of New Zealand asking the bank to consider house price “instability” when setting monetary policy.

Residential property prices have surged by almost 20 per cent over the past 12 months, pushing the median price of a house in Auckland, New Zealand’s most populous city, above NZ$1m ($700,000) for the first time, industry data shows.

Adrian Orr, RBNZ governor, said on Wednesday the bank would reimpose loan-to-value restrictions on lenders that it eased in May. Since then, he noted, there had been an increase in higher risk lending to property investors.

He added that the RBNZ would like to add debt-to-income restrictions to its macroprudential tool kit, a move that requires government approval.

“High-risk loans increase financial vulnerability to households, business and banks. For example, high leverage in the housing sector poses a risk should house prices decline or unemployment rises . . . we’re doing so to ensure that banks remain resilient to any future housing market downturn,” Mr Orr said.

Some lenders are already tightening lending. ANZ New Zealand said it plans to reduce the maximum loan-to-value ratio available to residential investors from 80 per cent to 70 per cent from December 8.

Policymakers in New Zealand are increasingly concerned that surging house prices during the worst recession since the second world war could lead to a correction and financial instability. House price inflation has accelerated to an annual pace of almost 4 per cent among the OECD club of wealthy countries this year and is even higher in the US and some EU nations.

New Zealand house prices surge

The surge in house prices poses a political problem for the government of Jacinda Ardern, who pledged to tackle housing affordability during her first term in office. But housing supply remains tightly constrained, pushing up prices, while government plans to build 100,000 homes within a decade were dumped last year after only a few hundred houses were completed.

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Wellington’s decision to write to Mr Orr to request a change to the monetary policy remit of the RBNZ to include house price stability has prompted a debate about the bank’s independence and the aggressive action it has taken to stimulate the economy during Covid-19.

Last month, the RBNZ asked lenders to ensure that they were technically and legally ready to handle negative interest rates by the end of 2020 — a move the market interpreted as a sign that the benchmark rate would be cut from its record low of 0.25 per cent.

Mr Orr said he had no concerns about the bank’s independence and it would work with government on housing supply and affordability. He also defended the RBNZ’s response to Covid-19, saying it limited the economic shock on businesses and households. He said the bank already considered housing costs and financial risks when setting monetary policy.

Cameron Bagrie, founder of research firm Bagrie Economics, said adding an explicit reference to house prices to the monetary policy remit, which currently focuses on full employment and inflation, would be a good move given concerns over house prices.

“The RBNZ has said debt-to-income limits would be a useful additional to the macro prudential took-kit. Give them the tools,” he said.



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