Editorial: Houses - might be time to wait and see

Personal investors should be taking heed of what loan-to-value ratio increases mean. Photo / Chris Loufte
Personal investors should be taking heed of what loan-to-value ratio increases mean. Photo / Chris Loufte

"Still booming", our front page declared yesterday, recording that it was not just Auckland that had enjoyed another year of rising house values. Tauranga's had increased by 20.5 percent in the year to June, Rotorua and Hamilton houses had risen by 17 percent.

Yesterday, the Auckland Council's monthly economic update recorded the city's growth over the year at 3.2 percent, with retail sales showing a remarkable 8.3 percent increase. Its employment had expanded by 6.5 percent and its unemployment was down to 4.7 percent.

All of these results reflect strong migration gains, a growing population, expanding consumer demand and, not least, the wealth created by rising house values. But all the figures should come with a caution. Annualised statistics are slow to reflect a change of fortunes.

In fact, they can hide a change by continuing to produce year-on-year comparisons until the change is many months old. The Weekend Herald reported the fears of several Auckland property developers that our four major banks may be about to "throttle" new housing projects in the region.

According to the developers, the Australian-owned banks are concerned house prices are peaking and they are under orders from their parent banks to reduce exposure to New Zealand borrowers. This accords with a warning given in a speech two months ago by ANZ chief executive David Hisco, when he warned house prices were "overcooked".

Banks were having to borrow offshore to fund the repaid expansion in housing loans, he said. "And this funding supply is not endless unless banks want to pay higher prices for it. I doubt banks can keep lending at the current huge volumes anyway."

He called for a voluntary tightening of lending criteria by all banks and said: "The current situation will see ANZ implement even tougher criteria for investment loans as house price inflation spreads from Auckland to other regions."

That is what seems to be happening. The big four trading banks have been reluctant to cut their interest rates in line with the Reserve Bank's reductions of its official cash rate, and they have been happy to impose the higher loan-to-value ratio for investment property that the Reserve Bank will introduce next month. In fact, the ANZ chief advocated an even higher ratio.

Personal investors should be taking heed of what loan-to-value ratio increases mean. They may help to slow the rise in house prices but that is not their prime purpose. They are primarily designed to reduce the lending banks' risk by classing a greater proportion of a house value as the owner's equity.

Property Council chief executive Connal Townsend told the Weekend Herald it was ironic banks were tightening their lending on new housing just as Auckland was "celebrating" a nearly completed Unitary Plan that will permit higher density development. But the banks' actions may be an expression of confidence in the Unitary Plan.

If the plan, as revised by an independent hearings panel, is capable of accommodating all of Auckland's projected population growth, as the panel claims, it becomes more risky to speculate on ever-rising house prices.

It is too soon to say the market has turned, but it might be wise to wait and see.

- NZ Herald

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