Deflating a housing bubble is a delicate task.
Let too much air out and you risk crashing the market, something no government wants to do considering the size of the bubble that’s evident in New Zealand at the moment.
Use the wrong instrument and you risk making it even harder for first-home buyers to purchase their own property.
Some experts argue the Reserve Bank’s tough new mortgage restrictions is the wrong instrument because it does just that.
In fact, it may even advantage some existing homeowners with large amounts of equity in their houses. The restrictions apply to new high-LVR loans, not retrospectively to existing loans and existing borrowers are only affected if they want to take out a top-up loan.
That’s not to say the new rules won’t help bring prices down.
Combined with major tenancy law changes taking effect this week, many New Zealanders are expected to pull back from buying a residential investment property, one real estate boss said in response.
“With property investors now making up about 27 per cent of all buyers, putting the brakes on them makes some sense,” Century 21 owner Derryn Mayne said. “Putting the brakes on many first-home buyers will be hard on young Kiwis though.”
The Reserve Bank’s move yesterday is not about trying to deflate the housing bubble, however.
It is designed to limit borrowers’ exposure should the bubble burst.
“A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt,” Deputy Governor Geoff Bascand said, adding that the central bank is concerned about the risk a sharp correction poses for financial stability.
The consequences of a significant correction to house prices would be significant, if not devastating, for homeowners and also for New Zealand businesses still reeling from Covid-19.
Let’s not forget the fact that many small-business owners need to borrow against their homes to support their livelihoods and those of their employees.
Basically, the housing market bubble is too big to burst.
So the Government has a fine line to tread as the pressure mounts for it to do something about the housing crisis.
Finance Minister Grant Robertson says the plan is to “tilt the balance” toward first-home buyers and incentivise new builds.
With house prices 17 per cent higher than they were a year ago, according to REINZ house price data, it is time for some “bold action” he said in his first major speech of the year in Wellington.
Quite what that will be won’t be revealed until the Budget in May.
However, it can be expected to focus on the demand side of the equation.
The most likely step appears to be a change to the bright-line test for residential property from five to 10 years.
That would mean any residential properties, excluding the family home, would be subject to capital gains tax if disposed of within 10 years of acquisition.
Whether such a move would shift the dial on house prices while interest rates remain low is also debatable.
But it’s clear the Government is not letting property investors out of its sights.
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