Reserve Bank Governor Adrian Orr describes high house prices as 'first-class problem', alternative is 'depression'

As New Zealanders grapple with out-of-reach house prices, Reserve Bank Governor Adrian Orr has described it as a "first-class problem" and that the alternative is "recession or depression". 

Auckland real estate prices are up 16 percent on last year, new data from the Real Estate Institute shows. Auckland's median house price has soared past the hundreds of thousands and hit the $1 million mark for the first time in history. 

The Reserve Bank is now considering bringing back loan-to-value ratios (LVRs) on mortgage lending. The restrictions were introduced in 2013 to cool the property market by slowing down liberal lending but were lifted in April for 12 months due to COVID-19. 

The Reserve Bank said on Wednesday it would begin consultations in December on the possibility of bringing back LVRs by March next year. The restrictions would target investors, who would once again have to raise 30 percent of a home's value for a mortgage. 

Orr says the Reserve Banks is "a bit worried about high-risk loans going to investors" and hopes the investor-targeted LVRs might cool down the market a bit, but ultimately he says the housing market is "operating well". 

"We're doing our job. It is a very, very tough international scene out there at the moment. We are in a relatively good place for New Zealand but we have to keep moving just to stay still and that is what we're doing with monetary policy," he told The AM Show on Friday.

"The fact we're talking here and complaining about house prices or these types of activities, that's a problem but it's a first-class problem. The alternative is being in a recession or depression and having high unemployment."

Reserve Bank Governor Adrian Orr.
Reserve Bank Governor Adrian Orr. Photo credit: The AM Show

Orr said first-home buyers have been back in the market since the LVRs were changed, which he described as "great", but the problem is property investors competing for low stock. 

"It's the investor part of the market that has been growing rapidly and putting lots of stress... they're competing against each other for the limited housing stock that's out there," he said. 

"The restrictions we're talking about will be primarily biting on the investor side - not the first-home buyer side. It's really that end of the market that we will see."

What is the Government doing?

Prime Minister Jacinda Ardern is concerned about the rapid rise of house prices, telling reporters on Thursday: "It just cannot keep increasing at the rate that it is."

"We do have concerns, as we always have, around affordability. A house is the most significant asset that most families will have and of course, in many cases, they want to make sure that that asset retains its value, but at the same time we have to make sure that people can access the housing market."

Ardern said she will "look again at whether or not there is more we could do to help overcome that big, significant hurdle of that first deposit", which under the LVR restrictions was 20 percent for first home occupiers. 

"The issue we have is we're coming off a low base. We are working very hard to build the stock that we need to make up for what has been a crisis built up over a number of decades," she said. 

Labour campaigned on KiwiBuild as the housing crisis solution, promising 100,000 houses in 10 years, but with just 258 houses built as of September 2019, the policy was 'reset' - the targets were dropped and it shifted towards progressive home ownership.

Prime Minister Jacinda Ardern.
Prime Minister Jacinda Ardern. Photo credit: Newshub

"We have to keep analysing every option we have to improve access to the housing market. I don't want homeownership in New Zealand to be determined by whether or not your parents can lend you a deposit. That's not the New Zealand we believe in," Ardern said. 

"That's why we're looking at progressive homeownership and rolling that out, why we're looking at whether or not our loan schemes are enabling people to overcome some of those big hurdles like deposits."

The Government's revamped KiwiBuild includes changes to the requirements for a KiwiSaver HomeStart grant. The deposit requirement was reduced from 10 percent to 5 percent. 

Ardern said the Government will begin repealing the Resource Management Act (RMA) - the piece of law which has been blamed for holding back building consents - in the first half of 2021. 

How is the market reacting?

ASB Bank has decided to move ahead of the Reserve Bank and increase the minimum deposit required from investors in the wake of the central bank's announcement.

"The number of applications we're receiving is at an all-time high, up 70 percent on this time last year, and while the proportion of first home lending is up, we have observed since COVID-19 a rapid increase in lending for investors," said chief executive Vittoria Shortt. 

"If this increase in investor demand continues it could lead the country down a potentially unsustainable path."

Orr has the support of Finance Minister Grant Robertson who has welcomed the Reserve Bank's decision to bring back LVRs. Robertson told Magic Talk: "I do think that's a sensible thing to do to avoid the financial stability risks of high-risk lending."

But Century 21 owner Derryn Mayne said she's seen no evidence of high-risk lending, and says not enabling as many first-home buyers into the market would be "such a cruel blow" given record-low interest rates while rents remain high.

"We as a country need to encourage young people into home ownership, rather than pulling up the ladder behind us," she said. "After all, this may well be the best chance young Kiwis have in their lifetime to buy a house." 

The Reserve Bank has also announced a new lending programme, offering to pump another $28 billion into the economy over the next couple of years through cheap loans to banks. Some pundits have questioned if contradicts bringing back LVRs.

"The simple thing how it works is we hope that it keeps retail interest rates - the interest rates that people borrow and invest on - low for a long time," Orr told The AM Show. 

Robertson said New Zealand currently has "the elements of a bit of a perfect storm" when it comes to the housing market and admitted it won't be solved quickly. 

"We obviously do have low interest rates at the moment but you combine that with the fact we've got a large number of returning New Zealanders coming into the market," he said, referring to the influx of returning Kiwis fleeing COVID-19.  

"We've also got the long-term legacy of not having built enough houses in New Zealand and the population growth that we've seen, so that's taking time to resolve. We never said we'd be able to do it in one term."