Economist suggests strategy to cool the hot housing market

Economists are looking at ways the hot housing market could be cooled. Photo / Dean Purcell.

Banks should be forced to hold more capital against investor mortgages pushing up the interest rate to help cool the property market, an economist believes.

Jarrod Kerr, chief economist at Kiwibank, said the rampant run in the housing market had "surely taken a negative cash rate off the table."

Last year, market expectations were for the official cash rate to go negative this year after the Reserve Bank continued to talk up plans to cut the OCR further.

But a Government call to the Reserve Bank to take housing into account as part of its decision-making as well as a faster than expected recovering economy has made that less likely.

Kerr said market pricing of further rate cuts has effectively been removed and wholesale rates have been shunted higher.

"Thoughts of further RBNZ easing have turned to thoughts of RBNZ tightening of macro-prudential policy."

Kerr said the next best step the Reserve Bank could take would be a reassessment and bank repricing of the risk associated with home loans.

"The risk weighting on home loans could be adjusted, to better reflect the higher risk associated with interest only and investor loans.

"Applying a higher risk-weighting on investor mortgages, forces banks to hold more capital against those loans, and ultimately price them differently."

Kerr said someone walking into a bank with a 30 per cent deposit, to upgrade their home,
should receive a lower interest rate than a leveraged investor buying their fifth investment property on interest only.

Banks have already made it harder for investors to get mortgages.

At the end of last year, ASB and BNZ brought back a 30 per cent deposit requirement for investors and ANZ increased its requirement to 40 per cent ahead of a plan by the Reserve Bank to bring back a 30 per cent loan to value ratio from March.

Westpac said it had not changed its requirements for investors despite the LVR being dropped back in April to make loan deferrals possible as the global pandemic began to bite.

Consultation on bringing back the LVR closed on Friday with the Reserve Bank expected to make a final decision next month although most consider it a foregone conclusion that the LVRs will be back.

Kelvin Davidson, senior economist at CoreLogic believes the Reserve Bank could even consider increasing the LVR to 40 per cent for investors this year, something which the ANZ has already called for.

He said it was almost 99.9 per cent certain that there would be a 30 per cent deposit requirement from the March 1.

"It's hard to see anything else. Our attention is probably more what happens after that because if you look back to the end of 2016 when a 40 per cent deposit requirement was bought in, back then we had investors with a high share in the market and rapidly rising house prices, politics were in place - something must be done about the housing market. Then we saw a 40pc requirement come in."

Davidson said a lot of those conditions were back in play again.

"Investors' share in the market is now about 27 per cent which is as high as it was in 2016. It just feels like everything looks the same. We wouldn't be surprised if we ended up at 40pc sooner rather than later."

But Kerr also said the tweaks to mortgage rates would not fix the housing problem.

"Attacking demand is not the answer. Fuelling supply is the answer. And fuelling supply is more a fiscal responsibility. The Government must step up, in support of the
councils, to unlock land, build the infrastructure, and provide long-term plans to tackle our chronic housing shortage.

"A multipronged approach that provides certainty is needed to channel resources into housing development."