Stimulants, depressants, & LVRs
Darcy is joined by Jeremy Couchman, a senior economist at Kiwibank, to unpack the names for the many stimulants and depressants intoxicating the housing market right now. From LVR and DTIs, to the other strange monetary drugs, let’s get a better idea of what we’re taking this summer.
L.V.R. has become Auckland’s most popular three letter acronym since N.W.A. was thumping out in Henderson in 1991. So what are LVRs, and why are they becoming the 2020 summer anthem?
To understand LVRs, listeners should look back to New Zealand’s response to the 2008 recession. In order to combat the housing pricing drop, New Zealand’s Reserve Bank slashed interest rates, making it cheaper for people to borrow money for their mortgage.
This acted as a stimulant. As many will remember, this stimulus then caused a surge in demand which inspired an uptick in the cost in housing.
Enter the depressant — a Loan to Value Ratio, restriction.
“It’s a ratio applied to prospective buyers. It’s the size of the loan, relative to your contribution,” said Jeremy.
These restrictions, originally brought in during the 2013 housing boom, were discarded by RBNZ in anticipation of a pandemic-induced recession this year. Less than a year later, and they’re on their way in again.
The new rules will mandate that residential home buyers will now need to cough up 1/5th of the purchase price in their deposit. For investors, this deposit will be up at 40%.
Jeremy explains that the Reserve Bank’s primary intention is to reduce the amount of risky purchasing going on banks’ books.
“If the value starts to fall, if the value of that asset drops below the mortgage that we’ve given you, then that puts us in a very difficult situation if that asset has to be sold quickly. We wouldn’t recoup the mortgage that we’ve provided.”
But it also has a clear secondary impact — a depression in housing prices. Naturally, if it’s harder to buy into an investment, fewer people will do it.
The next monetary depressant in line on the fiscal agenda is the bright line test. The bright line test is effectively a capital gains tax for shorter-term property investors (currently set at 5 yrs from time of purchase but likely to be extended).
“It’s an easy one for the government to implement, as it’s not defined as a new tax.”
As the laundry list of monetary drugs appears to be getting longer as the years go on. It’s as if the housing market is taking Ritalin to get through the work day, a glass of vino to relax, and sleeping pills to nod off.
The question now is whether it’s artificially forcing change on an otherwise natural state? Markets boom and then they bust – the pendulum swings – there’s gains and there’s losses. That’s the free market – and while it’s not at all pretty, it eventually creates ‘equilibrium’ and causes capital (investment) into the most productive areas of the economy.
By politicians and regulators putting coercive energy to try and manipulate the markets to look perfect, I fear we risk some worse down-wind affects, or at the very least, delaying or magnifying the inevitable ‘re-balancing’ that must occasionally occur.