Government may raise KiwiSaver home buyer deposit subsidy
Sunday 21 July, 2013
Government may raise KiwiSaver home buyer deposit subsidy if RBNZ introduces loan restrictions
Housing Minister Nick Smith has told TV ONE’s Q+A programme that the Government will review the current KiwiSaver maximum house price cap subsidy to better reflect the cost of housing, specifically in Auckland.
“We’ve had eight times the number of New Zealanders take their KiwiSaver – their savings, their employer contributions – pick up the Government’s grant and buy into the housing market. There are some things that we can do with KiwiSaver. I’m worried that the income thresholds and household thresholds have not been shifted for some years, and as a consequence, that’s a barrier. I’m having a fresh look at that, and we may make some moves in parallel with the Reserve Bank around where those thresholds are to make it easier for home buyers as we try and deal with this bigger problem,” Dr Smith said.
The Reserve Bank is currently reviewing its options in efforts to try to cool Auckland’s housing market. It’s proposing introducing a loan-to-value ratio (LVR), forcing banks to restrict the number of loans it approves with deposits less than 20 per cent.
Dr Smith told political editor Corin Dann that the Government had made it clear to the Reserve Bank that “home ownership’s a really important issue for us” and he was confident that “we’re going to get a package that works well for both the NZ economy and for those aspiring young families that want their own home”.
The Minister says that Aucklanders, in particular, found it difficult to access the start-up help for Kiwisaver because the price cap subsidy was restricted to houses $400,000 or less.
“I’m having a fresh look at that. I think it is important that those levels are realistic and need to respond to some of the changes that have occurred in the market. KiwiSaver, of course, helps the concerns that the Reserve Bank Governor has, because he’s worried about people going in with zero, 5% – very low deposits on homes. If we’re able to get KiwiSaver working, get people’s deposits built up, then he is comforted by the fact that there are less of those very risky mortgages – 95%, 100%,” Dr Smith said.
Meanwhile, the head of the Bankers’ Association, Kirk Hope, has expressed concern that if the RBNZ introduces loan restrictions it will simply force desperate house buyers and small businesses to borrow off higher interest rate lenders, or loan sharks, to build the required deposit.
“It’ll not just be first home buyers, but it might be small businesses that are trying to access additional capital. High LVR loans will reduce from around about 60 per cent, so what you’ll see is quite a reduction in the demand by restriction for those types of loans,” Mr Hope says.
“What you’ve seen in places like Canada, who have applied these caps, and Sweden, where these caps have been applied as well, is those first home buyers accessing the unsecured lending market to get the value of the deposit.”
Mr Hope says the RBNZ needed to justify why imposing a loan-to-value ratio tool was necessary.
“For example, we’re seeing lending flows declining, high LVR lending flows declining for the last quarter, housing approvals are declining, the rate in growth of housing approvals is declining, so all the figures are pointing to much more than just a seasonal change. So what we would want to see out of the Reserve Bank is much more justification,” Mr Hope says.
Mr Hope says he would support the Government raising KiwiSaver access to help first home buyers in tandem with any LVR restrictions imposed by the RBNZ.
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Q + A
CORIN DANN INTERVIEWS NICK SMITH
SUSAN Housing Minister Nick Smith says lack of supply is the main issue and he's working closely with Auckland Council and writing new government legislation to help free up land. They plan to build 39,000 homes in three years. The Minister spoke to Corin on Friday before flying to Australia for a look at their social housing. Corin began by asking him if he agreed the Reserve Bank has no option but to put tough restrictions on bank lending.
DR NICK SMITH – Housing Minister
There’s no gain for homeowners if we’re going to get the sort of bubble-bust regime that occurred both in Europe and North America. Where the Reserve Bank Governor is going is to very much try and avoid a major hike in interest rates. A hike in interest rates would be bad news for all homeowners, including increasing the barriers for first homeowners. It would also have a negative impact on the exchange rate for our exporters. So he’s looking at alternative measures. Those measures have been available for a long time. But I think because the rest of the global economy is still slow on the recovery, the risk for New Zealand is greater if our interest rates go ahead of other countries, and that’s why he’s so keen to look at the alternative tools of putting some restrictions on banks and giving out large amounts of loans with very small deposit. The Government’s concern is making sure that doesn’t get in the way of improving home ownership levels. I’m confident we’re going to be able to come up with a package that delivers on both of those.
CORIN It is going to, isn’t it, get in the road? All the banks say that this is going to lead to falling homeownership levels – this new measure to try and restrict low-deposit loans.
NICK I don’t accept that.
CORIN What are you going to do to stop that?
NICK No, I don’t accept that, because the biggest barrier to home ownership is actually those moving house prices. And if it’s possible for us to be able to get some measures in place that will put some constraint on the extent to which those houses are booming in price, then that actually helps the home buyer as well. It is a tricky balance, but it is one that I am confident the Reserve Bank and the Government is going to be able to deliver, that will keep interest rates low as long as possible, that will take the heat out of that Auckland housing market while we focus on getting the engine room of the house-building industry moving as quickly as possible to build those new homes we need.
CORIN In the short term, it’ll be the first home buyer over the next year to two years before that supply comes on board and while those new restrictions from the Reserve Bank are in place that will suffer, that will find it potentially after September—
NICK I don’t automatically accept that.
CORIN ...much harder to get a loan.
NICK I don’t accept that. Of course, a number of the people that are buying homes are those that are investors. These are the people in their 50s and 60s; they’ve got a few bob; they’re wanting to invest. They will be equally, and if we look at some of the very-low-deposit loans that are being granted by banks, they are as much for the investor part of the house market as it is for the first home buyer. The Government has made it plain to the Reserve Bank that we want to see homeownership rates improving, and that’s where I’m quite confident that we are going to be able to come up with a package that will see those issues of financial stability addressed, improved homeownership and try and take that bubble out of, particularly, the Auckland market.
CORIN So are you saying that when we finally see what the Reserve Bank Governor has come up with there will be some considerations for first home buyers? Because he has said he does not want exceptions, exemptions.
NICK Well, I think we’re in a little bit of the space of, you know, dancing with shadows in that the Reserve Bank Governor has not yet made his decision. He’s independent. He needs to make those. He’s consulted with the Government, the Government’s made plain that home ownership’s a really important issue for us, and I think we just shouldn’t prejudge and allow these issues to work through. I’m confident, having been involved in those discussions, that we’re going to get a package that works well for both the New Zealand economy and for those aspiring young families that want their own home.
CORIN Would you do anything outside those negotiations to help first home buyers? Perhaps lift the threshold on the KiwiSaver First Home Buyer grants or the Welcome Home grants?
NICK Well, the KiwiSaver scheme is really booming. You know, we’ve had eight times the number of New Zealanders take their KiwiSaver – their savings, their employer contributions – pick up the Government’s grant and buy into the housing market. There are some things that we can do with KiwiSaver. I’m worried that the income thresholds and household thresholds have not been shifted for some years, and as a consequence, that’s a barrier. I’m having a fresh look at that, and we may make some moves in parallel with the Reserve Bank around where those thresholds are to make it easier for home buyers as we try and deal with this bigger problem.
CORIN So, correct me if I’m wrong, but are they around about $400,000? Is that the limit for a house under the KiwiSaver scheme? So you would be looking to potentially raise that threshold a little higher, maybe?
NICK Those house prices vary around New Zealand. Currently, it’s 400 (thousand) in Auckland. The problem is there are not many homes in Auckland that you can now buy for 400 (thousand), and that’s making it really hard for Aucklanders particularly to be able to access that start-up help for KiwiSaver. I’m having a fresh look at that. I think it is important that those levels are realistic and need to respond to some of the changes that have occurred in the market.
CORIN And so you think it’s fundamentally not a bad idea, though, for people to use, ultimately, their retirement savings as a way of getting into the first— be a first home buyer and get into the market?
NICK Oh, I’m hugely encouraged and very positive about the way the KiwiSaver scheme is helping New Zealanders build up a decent deposit to be able to buy their own home. We saw this year over $130 million of deposits placed on homes from over 11,000 New Zealanders from their KiwiSaver funds. That’s an eight-fold increase of just two years ago. And while it is retirement savings, the most important part of KiwiSaver is savings overall. If young Kiwis are using their KiwiSaver funds to buy their first home, that is a good thing. I think all New Zealanders acknowledge that if you get to your retirement years and you don’t own your own home, that you’re having to pay rent, that you’re not in nearly as good a position as if you’d been able to get that deposit and own that first home. KiwiSaver, of course, helps the concerns that the Reserve Bank Governor has, because he’s worried about people going in with zero, 5% – very low deposits on homes. If we’re able to get KiwiSaver working, get people’s deposits built up, then he is comforted by the fact that there are less of those very risky mortgages – 95%, 100%.
NICK Because they have that larger deposit.
CORIN Just very finally, on the issue of land-banking. I know this has been a big issue for you. You’re very hot on this issue. Will you actually in any way follow through and really force some of these speculators that are holding on to plots of land, around Auckland in particular but other places, to actually sell, to actually move? Can you force them to do it?
NICK Well, land banking is a major concern, but it really is a product of land-supply policies not working. If you see section prices in Auckland over the last three or four years have been raising at about 16% per annum, a businessperson is going to take the attitude that that’s less than the cost of their capital, and they’d actually be kicking themselves if they went and sold off a hundred sections three or four years ago. We need to change the dynamic, free up more land through the accord and the agreement that we’ve reached with the Auckland Council so that we’re not getting that huge appreciation in land values. I do find it really offensive that somebody buys a block of land for $900,000 15 years ago, has done absolutely nothing with it, now on the market for $112 million. That needs to be stopped, and the best way to do that—
CORIN There’s an argument, though, that says this has been tried in London with a similar problem in that the talk there is they need to actually get in there and compulsory— take these properties back off in a compulsory way – actually force them to move.
NICK Oh, no, I don’t think that sort of approach would work in New Zealand. My view is that those land bankers are simply responding to the commercial incentives, and the job for Government and Council is to change those incentives, and that is what we’re going to achieve through that Housing Accord and through that Special Housing Areas legislation. By freeing up more land, you won’t get that massive increase in land values, and as a consequence, you’ll encourage them to bring that land to market.
Q + A
CORIN DANN INTERVIEWS KIRK HOPE
SUSAN The Reserve Bank is growing increasingly concerned about the overheated housing market, primarily in Auckland. In efforts to cool the market, it may implement loan restrictions, forcing home buyers to raise a bigger deposit when buying a house. But will it work or will it drive those desperate to own a home to borrow at higher interest rates simply to meet the loan threshold? Kirk Hope, CEO of the NZ Bankers' Association, is with Corin.
CORIN Kirk, thank you very much for joining us. Do we have a boom? Do we have a housing boom that we should be worried about?
KIRK HOPE – CEO, New Zealand Bankers’ Association
Well, I think we’ve got a supply issue, and that’s well documented. And the Government’s, you know, trying to bring about 39,000 houses online over the next three years in Auckland. You know, if they do that, they’ll address part of the problem, I think.
CORIN But in terms of the figures, we’ve got anywhere up to 20 per cent, some say, house price inflation annually in Auckland. That looks like a boom, doesn’t it?
KIRK Well, if you look at the last two cycles, I think the peaks were 25 per cent and 20 per cent, and I think currently the number’s more like 12 to 13 per cent in the Auckland housing market. Bear in mind, the rest of the country isn’t experiencing that type of house growth – house price growth.
CORIN So what I’m getting at here – have we got a problem that needs to be addressed by the Reserve Bank with these new tools?
KIRK Well, I think that’s a question that’s very much up for grabs, to be perfectly honest. I think one of the things that we would like to see is the Reserve Bank’s justifications if and when they use, in particular, the loan-to-value ratio tool.
CORIN So you don’t think we need to be resorting to these new tools?
KIRK Well, I think what we need to see is much more justification for it. For example, we’re seeing lending flows declining, high LVR lending flows declining for the last quarter, housing approvals are declining, the rate in growth of housing approvals is declining, so all the figures are pointing to much more than just a seasonal change. So what we would want to see out of the Reserve Bank is much more justification.
CORIN But, I mean, it’s pretty clear the prices are going pretty crazy in Auckland at least. I mean, we’ve had the IMF, for example, they’ve been saying consistently now that it’s 15 per cent overvalued. I mean, it’s widely agreed that our housing market is overvalued, isn’t it?
KIRK Well, I guess the challenge there is to determine what impact you can have on the demand side and what impact you can have on the supply side and how those two meet, actually.
CORIN So you’re saying that the banks are already cutting back on these low-deposit loans that the Reserve Bank wants to really limit? You’re saying that the banks themselves are restricting these?
KIRK Yeah, absolutely, so the flows and the high LVR loans for the last quarter have reduced by around 30 per cent to 25 per cent, so it’s actually quite a significant reduction in a quarter. The stock— The number of homes or number of loans that are in the high LVR stock across the banking portfolio sit around 22 per cent, and that will drop back.
CORIN But was it 30 per cent? That’s when the Reserve Bank started to get worried, wasn’t it?
KIRK The flow was at 30 per cent, but the overall stock is sitting at 22 per cent.
CORIN So you think that that’s enough, that if they self-regulate the issue, no need to come in with the heavy stick?
KIRK Well, I think banks are probably in a pretty good place to make an assessment of the risks that they want to take, and New Zealand banks by and large tend to be pretty conservative if you’ve seen the way that they’ve acted over the global financial crisis, over the recession in New Zealand.
CORIN Well, some people might have issue with that. If you look at, say, back at the year of 2003 when the Reserve Bank Governor was ramping up interest rates to kill off the housing market at that point, we saw the banks go offshore, access cheap money, bring it back in and have a mortgage war. I mean, that did not help the economy.
KIRK Well, I mean, I suppose what I’d say about that is we’re in a different set of circumstances now. But if you look back at that period of time, the question you’d have to ask is were banks lending irresponsibly? And probably a good sign of that is the number of mortgagee sales did not massively increase over the recession. So last year, for example, there were about 2200 mortgagee sales in New Zealand, and there are around 1.5 million mortgages in New Zealand, so that’s a very tiny proportion. It shows you that notwithstanding the rhetoric—
CORIN Right, so we can trust the banks that you can do it on your own; you don’t need to be regulated?
KIRK Well, I think if the Reserve Bank do choose to regulate it, they certainly need to be quite up front with the public about why they’re doing it and why they see it as necessary at this point.
CORIN Okay, let’s get to the impacts. What will be the impact if they bring in these so-called speed limits on low-deposit loans? What will be the impact on first home buyers and people trying to get into the market?
KIRK Well, it’ll not just be first home buyers, but it might be small businesses that are trying to access additional capital. High LVR loans will reduce from around about 60 per cent, so what you’ll see is quite a reduction in the demand by restriction for those types of loans.
CORIN But for your average couple, say, in a big city that is trying to get on the property market, can’t get a big deposit – they’re going to be out of luck?
KIRK They will be, or alternatively, what you’ve seen in places like Canada, who have applied these caps, and Sweden, where these caps have been applied as well, is those first home buyers accessing the unsecured lending market to get the value of the deposit.
CORIN So we’re talking about going to, what, loan sharks or…?
KIRK Higher interest rate lenders, that’s for sure.
CORIN And this has clearly happened in other jurisdictions?
KIRK Yes. There’s been an— There was a very significant increase in unsecured lending in both Canada and Sweden after they implemented the caps.
CORIN But isn’t the issue here about financial stability? That’s the Reserve Bank’s real motivation here. This is what it’s trying to stop, because these loans are risky. These big loans to, I guess, lower-income New Zealanders are potentially risky. Isn’t that the problem?
KIRK Well, I mean, that’s exactly the problem, and the point at which you determine how much risk is too much is the problem that the Reserve Bank faces, because no one wants to see the type of bubble-bursting that we’ve experienced or that, you know, has been experienced in other economies. So, yes, that’s exactly what they’re looking at.
CORIN What about exemptions, this idea? I mean, we know that John Key and others have been pushing hard to try and get the Reserve Bank to put some exemptions in for first home buyers. Could that work? Could you give them some exemptions?
KIRK Well, certainly, I think if the Reserve Bank’s main issue is the fact that first home buyers are driving the market, then they’re probably quite unwilling to go for exemptions. What the Government could do, other things like they’ve done in the past – subsidies for first home buyers, lower interest loans for first home buyers, things like that.
CORIN The flip side of this is that those who do have cash will benefit, won’t they?
KIRK Well, that’s one thing that we’ve argued, that what will happen is if you’ve got plenty of equity and you’ll be able to continue to access the market, and that’s not going to make the market slow down.
CORIN Just one last thing. KiwiSaver – that’s one way to try and boost first home buyers. They can get access to a grant. Is that the type of thing you think that could help in tandem?
KIRK Yeah, absolutely. I mean, it would have to be done, I think, in conjunction with, you know, the Government’s supply increases, because you obviously don’t want to create a worse problem than what you’re trying to fix in the first place.
CORIN Kirk Hope from the Bankers’ Association, thank you very much for your time.