It is now around five months since the Reserve Bank introduced its speed limits on high loan-to-value ratio mortgage lending. This change to bank lending policy was an attempt to cool the housing market without the unfortunate implications for the exchange rate that could come with an old-fashioned interest rate hike. At the same time, banks were forced to hold more capital against high-LVR (loan-to-value ratio) lending, which increases the cost of such borrowing.
At the time the LVR restrictions were introduced, opinion was divided as to how effective they were likely to be. Some predicted the market would find a way around the regulations, via non-bank lenders or creative lending structures. Others suggested that since cashed-up migrants and housing shortages were key drivers of the housing upswing, the impact would be limited. ANZ took the view that the measures would have a decided impact - and that if they didn't, the Reserve Bank would hike interest rates more aggressively than otherwise in a game they are determined to win.
With five months having gone by, it is appropriate to assess the initial impact the measures have had. Such analysis suffers from the typical problem one has when estimating economic effects - there's a lot going on, and we don't have the counterfactual - that is, we don't know how things would be looking had the measures not been introduced. Governments generally aren't keen on dividing their economy into a control group and a study group and changing policy for half - though Korea and Germany have provided some fascinating case studies over history.
But despite the limitations, it is nonetheless instructive to look at developments in some key variables where we would expect an impact to show up: mortgage interest rates, mortgage approvals, house sales, and house prices. It is also interesting to look at data by value tier: intuition would suggest that the lower end of the market is likely to have been harder hit due to the disproportionate impact on highly leveraged first home buyers.
The most obvious and rapid impact of the new lending policy is that the major banks started to loans that fall under the restrictions differently from other mortgages. This had happened on an ad hoc basis before, but the new transparency reflects a more rigid approach to tiered pricing.
In another telling development the number of mortgage approvals has dropped sharply. In the first nine months of 2013, mortgage approvals averaged 28,830 per month, seasonally adjusted. Since October, they've averaged just 25,760 per month s.a. - down 10.6 percent. This data mirrors a (smaller) fall in house sales: the seasonally adjusted number of house sales has dropped 3 percent in the period since October versus the first nine months of last year. It's not been one-way traffic: sales in Hawke's Bay have lifted 3 percent since October, the volatile Queenstown region has experienced a large rise in seasonally adjusted sales, and Canterbury/Westland has lifted 0.8 percent. But all other regions have experienced a fall in seasonally adjusted house sales since the restrictions were brought in. In some regions the fall has been precipitous: Taranaki has experienced a fall in excess of 11 percent, and Manawatu/Whanganui a 9.7 percent fall.
The bottom half of the market has experienced a sharper drop in sales since the LVR restrictions were introduced. The cheapest 10 percent of houses (Decile 1) is the only group that has experienced a price fall since October. The very top end of the market has largely sailed on.
Where sales go, house price inflation follows, typically with a lag of a couple of months. It is therefore pretty early to assess the impact on prices. However, flattening house sales are indicating that house price inflation has likely peaked. It's not a one-way bet though - strongly rising migration would beg to differ.
All up, the evidence is that LVR lending limits have had a marked impact. It is unlikely they can take all the credit for the slowdown - fixed mortgage interest rates have risen, due to a combination of higher expectations of future interest rate hikes, global interest rate developments, and the tougher capital requirements brought in at the same time. And in some areas the boom may well have been finding a natural peak constrained by affordability in any case.
For New Zealand's high house prices to be sustainable, income growth is required. In this regard it is encouraging to see the wider economy lifting at the same time that the property market is coming off its peaks. A proportional housing supply response is also key to preventing damaging boom-bust scenarios, and it is good to see residential building consents still rising. Moreover, we're seeing signs of pending action in regard to the release of land, consent costs, and construction costs. None are silver bullets, but the recognition that the supply side has a key part to play is a good start if some balance is to be restored to the market, particularly against a backdrop of strong population growth in Auckland.
With the economy now enjoying a broadening upswing, the Reserve Bank is almost universally expected to start raising interest rates next month, despite signs of cooling in the housing market. Fixed mortgage rates are already implicitly pricing in more than four 25bps of OCR hikes over 2014, i.e. more than one full percent. In that regard, the direct impact of an OCR rise will be limited to the floating rate. But one should not underestimate the "sticker shock" that would accompany the first interest rate hike in the past six years. With over 40 percent of mortgage lending is currently on floating rates, the Reserve Bank will be expecting to get considerable traction when they start to normalise policy. The housing boom is on notice.
• This material is for information purposes only. You should seek professional advice relevant to your individual circumstances. While ANZ has taken care to ensure that this information is from reliable sources, it cannot warrant its accuracy, completeness or suitability for your intended use. to the extent permitted by law, ANZ does not accept any responsibility or liability arising from your use of this information.
* Sharon Zollner is Senior Economist at ANZ Bank.