Low deposit dream fading

In the absence of any other alternatives, rapidly increasing house prices might see the Reserve Bank raise interest rates. Photo / Sarah Ivey

Exemption for first-home buyers less likely as PM acknowledges central bank's role.

The Government seems to have decided to get out of the way of Reserve Bank plans to curb low-deposit mortgage lending.

In previous speeches Prime Minister John Key has raised the prospect of some kind of exemption for first-home buyers.

As they represent about 30 per cent of new mortgage lending, and probably a large proportion of the 30 per cent of new mortgage lending which is on deposits of less than 20 per cent of the value of the property, such an exemption would undermine the effectiveness of the policy.

But in a speech to Local Government New Zealand's conference yesterday Key contented himself with saying that "first-home buyers are a priority for the Government".

He moved swiftly on to acknowledge that for the Reserve Bank its plans to regulate high loan-to-value-ratio (LVR) lending are primarily about protecting the stability of the financial system and averting the consequences, apparent in recent years in several Northern Hemisphere countries, of a property bubble bursting.

In the absence of any other alternatives, rapidly increasing house prices might see the Reserve Bank raise interest rates, which would affect all borrowers, and not be in the interests of first-home buyers, Key said.

Governor Graeme Wheeler has indicated he is reluctant to raise interest rates at this stage, when the recovery is still patchy, the dollar is overvalued and inflation expectations are low.

Key said housing bubbles overseas, as in the United States, had a very negative impact when in the end they burst. "It left US banks and many homeowners very exposed and it had a dramatic negative flow-on impact, as we all saw," he said.

Were a property bubble left unchecked in New Zealand some buyers could find themselves overexposed in an overvalued market. "And we all know what happens if those values start to fall."

Key cited housing accords, like the one negotiated with the Auckland Council, as the Government's response to the supply side of the problem of housing affordability.

"Demand-side issues are largely the purview of the Reserve Bank, which is independent, and they will in the end have to make a decision."

Housing Minister Nick Smith told TVNZ's Q+A programme on Sunday that the Government was looking into relaxing the rules around using KiwiSaver savings for the deposit on a home. Economists have pointed to relatively subdued rent rises in Auckland as evidence that supply shortages are not a complete explanation of the city's rapid house price inflation.

Infometrics economist Gareth Kiernan, citing Real Estate Institute and government data, said rental inflation in the Auckland region slipped to a three-year low of 3 per cent in the June quarter.

"Strong house price growth in Auckland means that rental yields in the city have dipped 40 basis points over the last year and are equal to the record low recorded in mid-2007," Kiernan said.

"The low yields suggest that landlords in the region are increasingly relying on capital gains to generate their investment returns."

Labour's housing spokesman, Phil Twyford, accuses the Government of siding with speculators, not first-home buyers.

"It has ignored calls from the IMF, OECD and Labour to introduce a capital gains tax to deal with speculators. National has also refused to deal with housing supply by rolling up its sleeves and building affordable homes as Labour will do," he said.

"Labour is calling for an interim exemption for first-home buyers from LVR [curbs] until speculators are dealt with and supply issues fixed."