Capping mortgages an option

03:30, Jun 04 2014

The Reserve Bank has not ruled out capping mortgages based on incomes, a move its British counterpart is considering to cool Britain's property market.

If New Zealand went ahead with the policy it would put pressure on house prices, particularly in Auckland where buyers could be forced to lower their sights by more than $100,000.

Bank of England governor Mark Carney recently suggested imposing an "affordability test" on borrowers and stopping home buyers from taking mortgages more than 4.5 times their salaries.

His comments came amid concern about rising property prices in the Britain, particularly in the London area, but affordability is even worse in New Zealand according to the annual Demographia survey.

It found the median New Zealand house price to be 5.5 times the median income, compared to a multiple of 4.9 in Britain, while Auckland houses at 8 times incomes were rated less affordable than London's at 7.3 times incomes.

Although mortgage caps are not part of its macro-prudential "toolkit" (including loan-to-value limits), the Reserve Bank of New Zealand says they could be looked at in future.


Several submitters to last year's macro-prudential policy review suggested this option, and the Reserve Bank agreed that "debt servicing is an important factor in assessing borrower vulnerability".

If lending was capped at 4.5 times incomes, the median household in Auckland with an income of $70,600 according to Demographia would be eligible for only a $318,000 mortgage.

With an LVR of 80 per cent this would buy only a $397,000 house, more than $160,000 less than Auckland's median house price of $561,700 at the time the survey was taken in January this year.

A household in Christchurch with a median income of $66,500 would be limited to a house worth about $374,000, close to the city's median price of $388,000.

The policy would not be a huge barrier for homebuyers in Wellington, where incomes are on par with Auckland but prices are cheaper. Here the median household with an income of $70,400 could afford $396,000, more than the median price of $386,700.

It would have even less effect in Palmerston North-Manawatu, where house prices are 4.5 times household incomes, the cheapest New Zealand market in the Demographia survey.

Economist Rodney Dickens of Strategic Risk Analysis said he was "dubious" about what effect mortgage caps would have, with people likely to try to get around the restrictions.

For example, when then-Prime Minister Robert Muldoon imposed limits on bank mortgage lending during the 1980s, 40 per cent of the mortgage market ended up going through solicitors' trust accounts, Dickens said.

"The long-term history of New Zealand has been that if you impose things like that, people will find a way around it."

Bankers Association chief executive Kirk Hope said Britain was similar to New Zealand in that housing affordability affects a single major city.

"There it's all about London, and here it's mainly about Auckland - both engine rooms of the national economy." However, he said Britain had lower interest rates than New Zealand and did not have LVR restrictions.

"Our banks are also required to hold more capital for their housing lending. Rising interest rates in New Zealand will have a dampening effect on the housing market, and we're already seeing that with a reduction in property sales. In addition, we also have LVR restrictions which have dampened demand in some parts of the market."