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No Silver Bullet: LVR Restrictions and the Role of the Reserve Bank in the Auckland Housing Crisis

Wednesday, October 16, 2013

In his address to the Property Council Of New Zealand yesterday, Deputy Reserve Bank Governor Grant Spencer gave a broad-view digest into the current housing supply pressure faced by New Zealanders, in particular, Aucklanders and Cantabrians.  

The Reserve Bank is under no disillusionment that LVR Restrictions are the silver bullet to the current market challenges, nor had it ever expected them to be.    In that respect, Mr Spencer was unequivocal from the off.  The central bank's mandate relates to financial stability, not social equity.  It is watching house prices with keen interest because of the extent this debt-fuelled market can impact (negatively) the New Zealand economy as a whole.  As such, the Reserve Bank is taking preemptive steps to mitigate price growth rather than to enable mass homeownership.

First home buyers are to be forgiven for being unsettled by this sentiment.  Bearing the heritage of a settler's society, New Zealanders hold landownership (and homeownership) as sacrosanct.  This innate cultural disposition has not faltered despite challenges relating to supply, population influx, and now, LVR Restrictions.  Although auction rooms are significantly quieter since 1st October, the law of unintended consequence has a sneaky way of distorting even the best laid plans.  Property commentators who had been through a similar period of restrictions in the 70s are predicting a reemergence of second-tier financiers.  Making life harder for borrowers in the mainstream banks drive their determination to obtain finance elsewhere.  It is only a matter of time before first home buyers are able to circumvent the current restrictions and re-enter the market.  

Undeterred by the naysayers, the Reserve Bank was bold in its estimated prediction that by 1st October 2014, 
  1. Mortgage credit growth will be 1-3% points lower; 
  2. Home sales will be 3-8% lower; and
  3. House price inflation will be 1-4% lower.
Mr Spencer was quick to point out that the current pressure on homeownership is the direct result of a chronically undersupplied market.  The LVR Restrictions are holding first home buyers at bay, for now.  The central bank hopes to buy enough time for other policy makers to come to the party.  The supply side of the equation can only be resolved by freeing up more land, speeding up consenting processes, and encouraging profitability in the building industry, none of these come under Graeme Wheeler's purview.  Mr Spencer is confident that 'provided the "red tape" costs and delays are reduced, there will remain a strong incentive to expand the housing stock, particularly in Auckland and Christchurch.'  

Changes are already underway.  Both the Auckland Housing Accord and Unitary Plan are preceded by pro-development overtures.  Housing is quickly shaping up to be the election issue of 2014.  Every politician worth his/her own weight will be expected to have a solution to what the media has conveniently dubbed The Great Kiwi Housing Crisis.  The question remains however, will first home buyers have enough patience and confidence in the Reserve Bank to keep their anxiety in check and hold fire before flocking back into the auction rooms?   

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