Reserve Bank buys us some time

Reserve Bank Governor Graeme Wheeler. The Bank is expecting banks to immediately honour its plan to require a 30pc deposit for property investors buying in Auckland. Photo / Mark Mitchell

The Reserve Bank confirmed today, as it has hinted since March, that it is targeting Auckland residential property investors in a bid to curb runaway house price inflation in the city and the risk that poses to household and bank finances.

The bank hopes today's measures will trim 2 to 4 per cent off house price inflation in the city compared with what it would otherwise be. But Auckland house prices climbed 9.5 per cent in just the last three months.

Landlords are the target because they are the marginal buyers, who set the price, in large tracts of the market. They are buyers who don't have to be there and the prices they are prepared to pay are the prices owner occupiers have to outbid to buy a home.

Those prices are inflated by low interest rates (which are likely to fall further), by tax distortions (which politicians are too craven to address) and by expectations of juicy capital gains - 12 per cent a year over the next five years according to one survey.

Under new rules to come into effect in October, but which the Reserve Bank expects the banks to honour immediately, property investors buying in the Auckland Council's territory will need a deposit of at least 30 per cent. Currently only half meet that test.

For owner occupiers in the city the existing loan-to-value ratio (LVR) rules remain unchanged.

But, in a politically shrewd move, the LVR rules are being relaxed outside Auckland, allowing 15 per cent of new mortgage lending (up from 10 per cent now) to be at LVRs of 80 per cent or more.

Locking some buyers out of the market will reduce pressure on prices.

For a while. The experience of the LVR regime introduced in late 2013 was that it cooled the market for maybe a year.

This is ad hoc, crude and ultimately temporary. It buys time. In the end only an increase in physical supply - so far inadequate - will avoid calamity.

But given the current heat of the market and international evidence of the economy-wide impact of a crash, for the regulator to just stand, arms folded, going "tut tut, this will end badly" would have been pathetic.