This opinion piece was first published in The Post on 30 May 2023.
The Reserve Bank’s loan-to-value ratio restrictions on mortgage lending are set to be relaxed on Thursday, raising expectations of a little more activity in the housing market. But because house prices have risen so much further than incomes since the start of the COVID-19 pandemic, limitations to debt-servicing ability mean that getting a mortgage will not become more achievable for most prospective borrowers. The Reserve Bank’s latest snapshot shows that lenders are testing mortgage serviceability against interest rates of around 8.6%. The current mix of interest rates and house prices means that borrowers need an income more than 40% higher than they did in March 2020 to meet servicing requirements – even with house prices having now retreated 17% from their 2021 peak.
This week’s changes will reduce the 40% deposit requirement for investors to a 35% deposit, alongside an increase from 10% to 15% of owner-occupied borrowing with a deposit of less than 20%. In announcing its proposed change in April, the Reserve Bank stated that “house prices have fallen towards a level that is more consistent with medium-term fundamentals.” The conclusion that housing is less overvalued than it was in 2021 is obvious given the 17% price fall. But the implication that housing is now perhaps not particularly overvalued is more startling. Is it really believable that house prices are now more sustainable?
According to the Real Estate Institute’s index, house prices are still 17% higher than they were in March 2020, and no one thought they were particularly affordable then. For those people with short memories, the REINZ’s index shows house prices increased by an average of 7.9%pa over the nine years to March 2020, running well ahead of income growth. That prolonged price surge made it two consecutive decades where the housing market had boomed and affordability had deteriorated significantly, before COVID-19 came along and made it even worse.
The Bank’s explanation for relaxing the loan-to-value ratio (LVR) restrictions is that it expects the changes to help improve efficiency within the lending system. However, the Bank’s actions might also start to support or revive the housing market when housing is still overvalued and unaffordable by historical standards.
Previous experience suggests that this week’s changes to the LVR restrictions, on their own, might be too small to have much of an effect on the housing market. The changes mirror the easing in LVR restrictions that occurred at the start of 2018. By the final quarter of that year, sales activity was increasing at a modest 5.9%pa, and house price growth was just over 3%pa – roughly the same rate it was at the end of 2017.
As we’ve previously highlighted, interest rates have been the biggest influence on house prices during the last few years. The plateauing of mortgage rates over the first part of 2023 has alleviated some of the downward pressure on house prices. With the Reserve Bank’s latest Monetary Policy Statement suggesting the official cash rate is now at its peak, interest rate movements look unlikely to make debt-servicing costs any more difficult for potential house buyers in the near term.
However, the possible effects of both the LVR changes and current interest rate expectations on the housing market pale in comparison beside the massive surge in net migration currently taking place. If the net inflow of more than 51,600 people in the last five months continues throughout the rest of this year, it would push New Zealand’s population growth to about 2.6%pa, a 70-year high. The current migration trajectory means we might need almost 47,000 more homes by the end of 2023 than if net migration had held where it was in October last year, at close to zero. So even with residential consent numbers reaching over 51,000pa during 2022, the implications of the migrant influx on the balance between demand and supply in the housing market cannot be overstated.
An end to the house price falls of the last 18 months might be welcomed by current property owners – particularly people who borrowed heavily during 2020 and 2021. However, it is the proverbial middle finger to young people who are either priced out of the market or face a lifetime of massive mortgage payments if they jump onto the housing ladder.
The very fact that the housing affordability discussion is framed in terms of migration flows, interest rate movements, and LVR controls shows how limited the available tools are for policymakers to try and resolve the housing crisis or, at least, how reluctant and unwilling leaders are to making fundamental changes to improve housing outcomes. Everyone still seems focused on the demand side, but until supply-side blockages are resolved and long-term changes made to support adequate housing supply, adjusting any of these demand settings will be partially effective at best.
The Medium Density Residential Standards and changes to the Resource Management Act are steps in the right direction for improving supply, with the former likely to start showing through in consent trends by the second half of 2024. But there is a risk that our inability to fund or construct the necessary expansions to civil infrastructure networks continues to constrain the housing supply. If that’s the case, we’ll be stuck with house prices equivalent to at least seven or eight times household income for a lot longer yet. We’ve got choices to make: stick with our woeful housing outcomes, or actually invest properly in communities, infrastructure, and houses so that young Kiwis have a chance at home ownership.
