What action next on house prices?
By the time the Government announced measures to curb house prices in March it looked as though the horse had already bolted and no longer had much puff.
The Reserve Bank is expecting annual house price inflation to drop back from double-digits to 3.9 per cent in the year to March next year. But it has been wrong before. So economists are nervously watching every hoof movement to see if the house-price horse will stay within sight of the stables, or if the bank will have to reach for more rope.
The Reserve Bank seems fairly confident it has already done about all it can usefully do to put a lid on loan-to-value ratios (LVRs).
Assistant governor Christian Hawkesby this month referred to ‘‘diminishing marginal benefits’’ from further tightening.
Ensuring most mortgages require decent deposits means that if house prices do sharply contract, the banking system should be protected from the worst of the fallout even if individual homeowners are not.
Next up could be debt-to-income (DTI) ratios which would aim to limit the proportion of borrowers who could get in over their heads in the first place.
If the Reserve Bank did go down the track of introducing DTIs, and there are certainly doubts, the more sophisticated way to do it might be to link them with LVR controls.
It shouldn’t be a threat to the financial system if people are borrowing many times their recent income if they are also putting in a high deposit on a property, after all.
Neither should it trouble the Reserve Bank if borrowers have only a small deposit, if they can comfortably afford the repayments on their mortgage.
It should only be a worry from a financial-stability perspective if lots of mortgages are being made with both a high LVR and DTI.
While they might often go hand in hand, there is probably a case for the Reserve Bank targeting only the combo if it does go down the DTI track, rather than constraining each separately.
But it might not be a good look if the bank was seen to be forcing aspiring homeowners to keep renting even if, or especially if, that was portrayed as being ‘‘for their own good’’.
Kiwibank economist Jarrod Kerr has noted the Reserve Bank could instead (or also) fiddle around with the ‘‘risk weightings’’ it applies to mortgage lending to assess banks’ capital adequacy ratios.
Increasing the risk weighting of mortgage lending would mean banks would need to tie up more of their own capital when making home loans, essentially making mortgage lending more expensive and less profitable for commercial banks.
The Reserve Bank had already been moving to tighten capital adequacy ratios to a higher level pre-Covid though. So it might want to consider applying more generous risk weightings to business lending if it did any fresh tinkering. There would be some excuse to do that.
Business lending has fallen sharply in the wake of Covid, so that which is still occurring may well be less risky and is almost certainly less of a threat to financial stability, even if only because of its lower volume.
A permanent rejig of capital risk ratios might be a tempting way for the Reserve Bank to address longstanding concerns that the economy is skewed towards investment in unproductive assets. But these are changes it would normally take a long time to consider and on which it would consult widely.
Would any of these measures have much of a short-term impact on house prices?
They might.
The trickier question is what long-term effect they would have on housing affordability more generally (including rents), if any.
The underlying problem with the housing market is that strong immigration and supply side inefficiencies have contributed to a situation where we have too few houses and too many people – to the extent that the housing market appears in danger of locking up amid low liquidity.
The only quick way to alleviate that is by introducing incentives to increase average occupancy levels.
But that can only have a small effect at the margins and doesn’t appear to be of much interest to politicians. Far more rewarding to find a villain.
Yet overt attempts to make housing less ‘‘profitable’’ can be expected to discourage housing supply even if attempts are made to ring-fence new home builds, given that is not really possible to do.
New homes become second-hand homes sometime down the track, so the returns investors expect from new housing are likely to be impacted to some extent by measures including the new tougher ‘‘brightline test’’ whatever carveouts are made for new builds.
More significantly, if prices for existing houses are expected to decline, that will also have a dampening effect on prices investors can expect from building new housing on its first sale. Where does that leave us?
For the time being, with economists still staring at a horse, hoping it just can’t keep trotting forever.