Reserve Bank says that houses under construction will be exempt

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The Reserve Bank has done an abrupt about-turn and is now exempting new house builds from its "speed limits" on high loan-to-value lending.

This follows considerable pressure being brought to bear by the building industry in particular. See here for articles on LVRs.

Registered Master Builders Federation chief executive Warwick Quinn said he was "delighted" with the RBNZ announcment.

"With the exemption now in place building companies will be able to plan with more certainty and those companies who were contemplating restructuring in early 2014 and laying off staff will now hopefully not need to."

And Kiwibank was the first bank to react to the RBNZ decision with its chief executive Paul Brock announcing a 4.99% floating rate special for new owner-occupied construction. The bank has already been promoting a 4.65% floating construction loan offer in Canterbury as part of its rebuild commitment for the area following the earthquakes.

"We are already able to provide Welcome Home Loans without restriction. This enables us to help more people get into their own homes."

The special floating rate offer is a 0.66% discount on the published variable rate for the first two years from drawdown. The offer will be available for a limited time, Kiwibank says, with normal lending terms and conditions apply.

RBNZ's Deputy Governor Grant Spencer made the official announcement earlier that new residential construction loans would now be exempt from the LVR limits, with the exemption back-dated to the start of the limits on October 1.


Prior to today's announcement there were exemptions to the LVR policy for loans made under Housing New Zealand’s Welcome Home Loans scheme, the refinancing of existing high-LVR loans, bridging finance or the transfer of existing high-LVR loans between properties.

In making the change involving new builds the RBNZ has conceded that after it sought additional information on high LVR construction lending, the information had suggested the amount of such lending "may be more significant than previously thought".

"The Reserve Bank has recently consulted with the building industry and banks on the impact of LVR restrictions on residential construction activity," Spencer said.

While high LVR construction lending is only around 1% of total residential lending, it finances around 12% of residential building activity."

The RBNZ's now estimating that this 12% is the equivalent of up to 200 new builds per month.

Auckland and Christchurch currently account for more than half the country’s new dwelling consents. While the regional allocation of high-LVR construction loans is not known,  the RBNZ said it would expect the greatest impact of the exemption to be felt in Auckland and Christchurch.

The RBNZ is denying that this new exemption will defeat the purpose of the LVR limits.

The central bank said that the exemption would support new building "and therefore help to moderate house price pressures". This was "consistent with reducing systemic risk in the banking system".

The RBNZ would be monitoring banks’ construction lending, to ensure that "normal prudential standards are maintained" at the individual bank level.

Spencer said the new exemption meant that low deposit lending would fall outside the 10% speed limit, if it is financing the construction of a new house or apartment.

"However, any new low deposit construction loans will still need to meet the internal risk requirements of the lending banks."

Spencer said the new exemption would apply to all qualifying construction loans from October 1, 2013.

"This exemption will help to support the supply of new housing and, in doing so, reduce some of the pressure arising from excess demand in the New Zealand housing market.

"The Reserve Bank will communicate with banks to clarify which loans will qualify for the exemption," Spencer said.

ASB economist Christina Leung said the RBNZ had acknowledged in its earlier analysis of the effects of the high LVR restrictions that reduced construction of new houses may be an “unintended consequence” of this new macro-prudential tool.

"There have been recent anecdotes from building companies that the restrictions on high-LVR lending, which took effect on October 1, are discouraging house-building demand. Building companies are reporting concerns amongst some households that if a top-up in mortgage borrowing is needed should unexpected additional building costs be incurred once the building project commenced, then there is the risk of the mortgage hitting the 80% LVR threshold and impacting projects," she said.

Leung said the RBNZ’s "starting point" was that the LVR restrictions would have little effect on new building.

"However, early evidence raised question marks about that assumption. This exemption removes an unintended consequence of the LVR restrictions, and may encourage construction growth at the margin in the near term. However, given the new supply of houses would likely be higher than otherwise with these exemptions, there is likely to be less pressure on the housing market over the medium term."

Comment from David Hargreaves:

However the RBNZ chooses to spin today's announcement, there's no doubt this new exemption is a smack in the face for Governor Graeme Wheeler and a policy that in many respects he has staked his reputation on as Governor.

That this exemption has come so quickly following the introduction of the LVRs - and now backdated to the October starting date - means that it will inevitably water down the policy.

Additionally, the fact that one strong lobby group - the building industry - has been able to wield its powerful carpenters' arms and force the Governor's arm back behind his back, must inevitably clear the path for further future exemptions.

It was not very many weeks ago at all that Wheeler was saying he still saw no grounds for exemption for new builds.

Surely an exemption for the first home buyers will now be next. Look for that one early in the New Year.

What this all ultimately means is that, whether you thought it was a good idea or not, the LVR policy is now fast becoming a waste of time.

The RBNZ may as well now say to hell with the high valued New Zealand dollar and rip in there with an interest rate hike.

A watered down LVR policy will not dampen the housing market. A blast between the eyes with higher interest rates will. It might cause some damage as well, which is what the RBNZ was worried about in the first place, but that might now be the only option.

Comment ends.

20080428

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新人

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我勒个去啊

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