The latest monthly QV house price index results are no real surprise. Values increasing almost everywhere, and in some places - like Hamilton, those increases are happening at rates not seen since the heady days of the 1980’s.
So whilst there is nothing earth-shattering to report about on that front, there were two reasonably significant events this month, both of which have potential to change the future direction of our housing market. The first is the latest round of lending restrictions announced by the Reserve Bank, and the second is the Proposed Auckland Unitary Plan (PAUP).
The latest round of lending restrictions
Last month we discussed the recently delivered speech by the RBNZ Deputy Governor in which he talked about potential measures they could take, but didn’t. Then on July 19th they unexpectedly announced that they were tightening the existing ‘LVR speed limits’.
The existing limits allowed banks to allocate up to 15% of their new lending to customers with less than a 20% deposit when they were buying outside Auckland. In Auckland the limit was 10%. The change to 15% outside Auckland was only put in place last November but the rapidly increasing values nationwide has led them to reverse that change and bring the limit back to 10% everywhere.
The RBNZ also significantly tightened lending rules for property investors nationwide, who now require a 40% deposit in most cases (previously Auckland investors needed a 30% deposit, while outside Auckland it was 20%).
Furthermore, they also said they were progressing their work on limits to high debt-to-income ratio lending which could be put in place to complement the LVR restrictions. These limits could be in place as early as later this year.
When they have previously announced changes to LVR limits there has usually been a lead-in time during which people could act quickly to beat the new rules. That was a potential concern this time too (that if new lending were announced for investors, it would potentially inflame the market further). That door has slammed shut. While the RBNZ said the new rules would come into effect on September 1st 2016, they also urged the main banks to abide by the spirit of the new rules immediately. And they did. By the end of the following day all of the major banks had announced that the new restrictions would apply with immediate effect.
So what is the likely impact of these new lending restrictions? We have already seen two rounds of LVR limits put in place, the first in October 2013 and the second in November 2015. In both cases the impact of the changes was a slight and short term impact on sales volumes and values.
The Reserve Bank’s own analysis expects these measures to slow property value growth by 2% to 5% less than would have been the case without these restrictions. So if values in an area were going to increase 15% then they would now slow to say 10%. They don’t expect prices to crash.
These tighter lending rules will likely hurt some first home buyers outside Auckland who will now struggle to get a loan using their 20% deposit as the banks are now required to lend to fewer people with 20% deposits. This also comes at a time when prices are rising rapidly.
Property investors are a larger target for the RBNZ who are looking at our buyer classification data and their own statistics collected from the banks and seeing a continued increase in investor activity. Overseas research also shows that lending to investors is the most at risk in the event of a property market downturn. Given that protecting the banks, lenders and the wider economy is the main reason that the RBNZ is acting as it is, then this property investor activity is evidence enough to act.
These tighter lending restrictions on investors is going to mean that some will be knocked out of the game: at least for the time being.
However investor groups I have spoken to very recently are not talking about pulling back, instead how to get around the lending limits. This includes splitting their portfolio across different lenders, including non-bank lenders - who at this stage are not subject to the RBNZ restrictions.
While capital gains continue to look likely, investors will continue to invest in property. What other choices do they have at the moment with interest rates so low and the stock market perceived as more volatile.
One really important point to note is that new builds and off the plan purchases are exempt from these new restrictions. In part that should encourage more new building. I think it will definitely make investors look more at new builds than existing stock. Might that put even more upward price pressure on new builds and less on existing? I reckon it might.
Clearly we will be watching our buyer classification analysis closely to track exactly how property investors, first home buyers and movers are impacted.
Then we have the potential debt-to-income (DTI) restrictions the RBNZ is considering. At first thought I would expect these to hurt first home buyers more. However the RBNZ’s own analysis shows that the lenders most exposed to DTI restrictions are investors. Happy days if you want to slow them down!
Proposed Auckland Unitary Plan
The second big change since last month is the Proposed Auckland Unitary Plan. This is all about changing the planning rules in Auckland to allow more high density housing within the city and also extend the urban limits further out.
The first version of this plan was voted down by Auckland Council earlier this year and there were concerns that public consultation wasn’t carried out correctly. So the plan has been under consideration by an independent committee and their version of the plan was released on July 22nd 2016.
This revised version of the plan has the potential to substantially increase the supply of housing in Auckland by over 400,000 over the next 30 years.
The plan now has to be considered by the Auckland Council in the coming weeks and they are going to have to weigh up Auckland’s future needs against the continued resistance from some resident groups. I suspect that if the Council rejects the unitary plan then Central Government will be deeply unimpressed.
While the unitary plan allows for much more high density housing and extends the limits of Auckland, the constraint will be how quickly these houses can be built.
Current demand for building is already putting significant pressure on the building industry and stories are emerging of quality suffering as a consequence in some cases.
We are currently building just over 8,000 dwellings a year. In order to meet the new plan we would need to build 13,000 dwellings each year for the next 30 years. That’s going to take quite some effort!
In the short term, if the plan is ratified by Auckland Council then there would be certainty about which properties are now able to be developed into apartments or townhouses, and where the urban limits will be extended.
That could mean that properties capable of being developed for high density could either dramatically increase their value as developers swoop in or the sheer number now available could mean their price drops. I suspect the former, but time will tell.