July 26, 2016 by Dymphna 7 Comments

40% deposits. Could it happen here?


Tough new lending limits across the pond in NZ. Why did they happen? Could they happen here?

So the Reserve Bank of New Zealand rocked the property market across the Tasman last week by introducing new lending limits.

If you’re an investor in New Zealand, there’s a good chance you’ll be asked to stump up a 40% deposit for your next property.

The rules don’t apply to individuals directly. Rather, they go through controls on the bank’s mortgage books. These controls have been in place around Auckland, where the property market is running hot, but now they’re being extended across the country.

Under the new rules that will come in on September 1:

Banks will be forced to require a 40 per cent deposit – up from 30 per cent – for at least 95 per cent of the loans they make.

Owner Occupiers
Required deposit level remains at 20 per cent for at least 90 per cent of bank lending.

Given a lot of investors I know put down just 5 or 10% on their last deals, these kinds of limits could be a bit of a shock here.

But could it happen here?

How different is the situation over in New Zealand? We’ve already seen APRA put some limits into play last year. Could they take things further?

Could 40% deposits happen here?

In a lot of ways, the economics of what’s happening in NZ and Australia are quite similar. But politically, we’re worlds apart, and I can’t see these kinds of limits becoming a reality any time soon.

So if we look at what’s driving the RBNZ decision, the simple story is that the market is running too hot. But hot markets and growing prices aren’t a problem in and of themselves.

Rather, you’ve got to look at the institutional context where the growth is taking place. And it’s that context that is making the RBNZ nervous.

Let’s take a look at a speech from the RBNZ’s Grant Spencer, and see how it stacks up with the Australian situation.

“New Zealand is experiencing a housing market boom. House prices are increasing at 13 percent per annum nationally, and at 15-20 percent in Auckland and close-by regions.”

Ok, so things in NZ are moving at a pretty quick clip. We were seeing growth of 13% in Sydney at the peak, but no markets were sustaining a 15-20% pace. Still, growth has been quick in Australia on any measure. He goes on:

“The Reserve Bank is mandated to promote the soundness and efficiency of the financial system. Our concern is that a severe housing correction would pose real risks for financial system stability and the broader economy. The banks are heavily exposed to housing with mortgages making up around 55 percent of total assets. Household debt, at 163 percent of household income, is at a record level.”

This is where the comparison gets interesting. Australian banks have about 60% of their assets in housing, with considerable exposure to offshore financing. Australian household are the most indebted in the world as a percent of GDP, but as a share of household income, we come in a bit under the Kiwis.

If this were the full argument for restrictions in New Zealand, then the argument might be just as valid here.

But this isn’t just a credit story. Demand is fundamentally strong:

“Many domestic and international factors are contributing to the strength of the market. The current record low interest rates are a world-wide phenomenon linked to post-GFC caution and very low inflation in the global economy. Also driving local housing demand has been an unprecedented net migration inflow over recent years reflecting New Zealand’s stronger economic performance relative to many other advanced economies.”

Exactly the same here. But then we get to the crux of the issue.

“While strong demand has been underpinned by low interest rates, rising credit growth and population increases, the housing supply response has been constrained by planning and consenting processes, community preferences in respect of housing density, inefficiencies in the building industry, and infrastructure development constraints… The key challenge in the long run is to expand housing supply to meet the growing demand…”

And this is where we find ourselves in exactly the same boat. We’ve had strong demand – fed by record low interest rates, a mining boom and strong immigration inflows – butting up against supply constraints. This is what is driving prices.

A lot of people might wish that affordability was just about negative gearing or something like that, and that there was a magic bullet solution. There isn’t. You want affordability, you’ve got to build more houses.

And this is where our kiwi cousins seem to be ahead of us on the curve. Right now there’s a vigorous debate around housing and what to do about it. It’s a central issue and everything is on the table – including overhauling urban growth limits and planning regimes.

But what’s happening here? Nothing. Radio silence. Turnbull just announced one of the biggest ministries in years, and there’s no housing minister.

Somehow, housing has become a non-issue.

And without the public clamouring for more action, there’s just no way we could see the RBA or APRA bring in anything like these restrictions. It just wouldn’t fly.

We’d need a whole lot more heat and a whole lot more noise before that could happen.

So that’s my opinion. 40% deposits? Just not happening.

Could you see it happening here?