By Frank Newman on 14th May 2016
It’s been a big news week. Data about foreign ownership has been released for the first time, the Reserve Bank signalled tighter lending restrictions are likely, and KiwiBank has taken mortgage rates to a new low.
Since 1 January this year Land Information has been collecting data about the residency of property buyers. The figures for the three months ended 31 March show 3% of home buyers are overseas residents.
It is only three months of data so the findings have a high margin of error. A more accurate picture will emerge after the next couple of quarters have been reported, but despite that the data should not be dismissed.
Of the 1089 properties sold to non-residents during the first quarter, 321 were bought by Chinese buyers, 312 by Australians and 99 by people from the UK. About the same number of properties were sold by non-residents so the net demand was nil! In other words, their activity was demand and supply neutral.
That shows the claim by some that up to 40% of buyers are Chinese is ridiculous. Those same people are now claiming the figures are unreliable, but even if the figures do understate the buying, which I doubt, it is not to the extent they would have us believe.
The figures are such that an idea floated by the Prime Minister that would see foreign home owners charged a land tax is unlikely to go any further. That’s not the case for proposals raised by the Reserve Bank last week.
The Governor said they are looking at the possibility of introducing new lending restrictions or tightening existing ones to bring rampant house price inflation into line. The Reserve Bank is genuinely concerned that the house price boom poses a serious risk to the economy. By that they mean any correction in house prices is likely to create serious investment losses to highly indebted home owners, which would create a flow-on effect on spending and economic activity. Auckland remains their main area of concern, but that’s not to say the Bank will not apply any new regulations beyond Auckland.
A new policy idea being raised is debt to income restrictions. Essentially that limits the total debt of a borrower to a multiple of their income. It’s an approach that is used abroad. In Britain most buyers are not able to obtain a mortgage higher than 4.5 times their annual income.
This would have a particular impact on first home buyers and investors, who typically have higher debt than other home buyers. In the words of Deputy Governor, Grant Spencer, “It would probably impact investors more than first-home buyers. You could differentiate between investors and owner-occupiers. I’m not saying you would but saying what the possibilities are”.
This is just one of a number of options the Reserve Bank is discussing with the government. They have also suggested the government have a look at property tax policy, and singled out the ability to offset losses against other income. It is quite possible this may be part of Budget 2016 which is to be announced on 26 May. “Ring fencing” property investment losses would be quite a shift in tax policy, but may be attractive for the government as it targets investors, would not affect most people, and would help their tax take. In my view that policy would not in itself have any dampening effect on property prices, which are driven my much more fundamental issues like immigration, under-supply, and historically low interest rates.
KiwiBank has set the pace for low interest rates by cutting its two-year fixed rate mortgage to 3.99%. The special is available to borrowers with a 20 per cent deposit and is on offer for two weeks only. The next best rates for the two year term are Westpac and ASB Bank at 4.19%.
Given the ease of financing large amounts of debt at historically low interest rates, and the prospect that rates will go lower when the Reserve Bank reviews the Official Cash Rate on 9 June, I believe it highly likely that the Bank will try to pour cold water on the hot housing market through regulatory mechanisms and by convincing the government that it too needs to do more in the area of property tax.
Two key dates ahead are Budget day on the 26th of May, and the OCR Review on the 9th of June.