What's happening with the market
Here is a very good summary from Bernard Hickey of what's happening the property market and where banks are at and what pressures they are facing.
"Market Cooling through winter House prices in Auckland have continued to edge lower as a winter chill has set in, and the cooling is spreading to surrounding larger cities.
The effects of the Reserve Bank’s 40 percent deposit rule for rental property investors is still rippling through the market after its introduction in the second half of last year. A slight rise in interest rates in late 2016 and a toughening of lending criteria by the big four banks has also dampened activity.
Real Estate Institute figures for May showed the House Price Index for Auckland fell 0.7 percent in the month and is down 1.0 percent from three months earlier. This index takes into account the skewing effect of more houses in the expensive brackets selling than cheaper homes, which rental property investors would be more likely to buy. The raw median price for Auckland rose 0.6 percent as fewer cheaper homes were sold to rental property investors.
Elsewhere, Waikato’s House Price Index fell 1.0 percent in May and was up 1.6 percent from three months ago. Bay of Plenty’s growth rate, which includes Tauranga and Rotorua, fell to 0.6 percent in May and the index there is up 2.0 percent from three months ago. Northland house price inflation, which includes Whangarei, was also weaker at 0.8 percent for the month.
A significant factor in the slowdown is a change in approach of the big four banks, who are reaching their internal limits for funding and face extra capital requirements on both sides of the Tasman.
In the years before the Global Financial Crisis, the big banks were able to easily go into ‘hot money’ markets in London and New York to borrow cheaply for 90 day terms and then lend that money out in New Zealand as longer term mortgages. New funding rules imposed in 2010 now restrict the banks from simply jumping into these ‘hot money’ markets whenever they can’t find enough local deposits. Deposit growth has been weaker than lending growth for over a year, which leaves a gap that banks have had to fill by borrowing on more expensive long-term debt markets overseas. Some of the big four banks are also up against their internal limits for this type of borrowing and so they are having to slow their lending and increase their interest rates to attract more deposits.
Secondly, the Australian Prudential Regulation Authority and the Reserve Bank are reviewing capital requirements. They are both expected to increase the amount of equity capital that banks have to hold in reserve against every loan. That too is reducing bank appetites for lending and increasing costs.
However, there are still plenty of solid underpinnings for prices on both the demand and supply side. Jobs growth is still running strongly at over 5 percent per annum and unemployment is below 5 percent and falling. Net migration remains at record highs despite predictions of falls and housing supply is still growing slower than it needs to in order to keep up with population growth.
There were barely 10,000 building consents issued in Auckland last year to cope with population growth of over 50,000. A shortfall of around 5,000 new homes was added to a shortage already estimated at 40,000 for New Zealand’s fastest growing city. That shortfall is not expected to be eaten away quickly given building consents are now trending down and the big banks have stopped lending to many apartment and section developers.
Rents are now rising in Auckland and beyond to support yields for rental property investors and neither the National, Labour or New Zealand First parties are planning to impose a capital gains tax on rental properties. Interest rates also remain low and the Reserve Bank expects to leave the Official Cash Rate on hold at 1.75 percent until early 2019.
One potential cloud on the horizon is a new Reserve Bank limit on debt to income multiples. The bank is now consulting with the public on the potential tool, but has said it would not use it at the moment even if it had it because of the recent moderation in house prices. It issued a consultation paper in June that modeled the impact of a speed limit for lending of five times income.
Similar to the loan to value ratio limit, banks would not be able to do more than 20 percent of new lending at over five times income. The bank estimated 45 percent of current bank lending was being done at over five times income so a speed limit would have a significant effect. The bank estimated such a limit would reduce credit and house prices by between two to five percent, and could reduce sales volumes by nine percent.
The Government has yet to approve the use of the tool, and a second round of consultation would also be needed before it could be used in anger. At the moment it remains an unlikely prospect, but another acceleration in inflation would make it more likely.
The bottom line:
- · House price inflation has slowed nationally and prices fell a bit more in May in Auckland and some surrounding cities, but not much elsewhere.
- · The Reserve Bank has forecast an unchanged Official Cash Rate through all of 2017 and all of 2018. It does not see the first hike until late 2019.
- · Banks have stopped lifting longer term mortgage rates and some are tightening lending. They have pulled back from lending to developers.
- · The Reserve Bank is unlikely to be able to introduce a DTI limit in 2017. It has to do lengthy consultation and it has said it would not use the tool right now even if it had it because of the market’s moderation.
- · The key variables to watch in 2017 are China’s bad debt situation, Europe’s financial and political dramas, global inflation and interest rates, New Zealand’s election result, and Donald Trump’s twitter account."
By Bernard Hickey