Mortgage brake a headache for Key

VERNON SMALL
Last updated 08:26 18/07/2013

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Vernon Small

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OPINION: For most New Zealanders a house - or should that be a mortgage - is a birthright.

Scrimping and saving for a deposit, with a bit of help from the rellies and, of late, cashing in on KiwiSaver, to buy a home is a rite of passage - admittedly for a shrinking majority.

Behind the daily headlines about David Shearer's handling of Labour's man ban or Prime Minister John Key's threatening outburst against the Human Rights Commission, the cost of housing and the supply of affordable homes are nagging away at the Government like persistent toothache.

So when a problem arises - such as the looming move to ration lending to low-deposit house buyers - no government is going to sit idly by while its popularity goes out the double-hung bay window.

Labour has a concrete plan and an easily understood message: A capital gains tax to discourage speculation, 10,000 houses a year built by the state and on-sold at an affordable price.

By comparison, the Government's more dissipated solution - changes to consent laws, the Housing Accord and the work on urban limits - lacks the wow factor to make a big impact during an election campaign.

With that in mind, the Cabinet has been keen to forge ahead with measures to encourage greenfield development to get some runs on the board.

Enter the price boom in Auckland and Christchurch, which threatens to spill over into other areas, and the Reserve Bank's limited options to counter it. An interest rate hike, in the face of the lowest inflation for more than 13 years and when the dollar is uncomfortably high, would hardly help the economy or buyers of their first homes, in the short term at least. The closer to the 2014 election we get the more likely an interest rate rise becomes and the less welcome it will be for the Government.

It's against that background that the central bank and the Government have embraced the idea of limiting high loan- to-value ratio (LVR) lending - defined as borrowing with less than 20 per cent of the purchase price as a deposit. There is also likely to be a separate band limiting lending even more tightly for those with only 5 per cent deposit.

First-home buyers will inevitably feel the hardest squeeze and Mr Key tried to jawbone the Reserve Bank into exempting them from the rationing regime, to no avail.

It has left the Government in a bind, partly of its own making, and in need of a cunning plan. How to allow the bank to pull the levers that might control the credit and housing boom without leaving a raft of new home buyers out in the cold?

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If 30 per cent of loans are going to low- deposit borrowers now, many for their first home, and with the Reserve Bank looking at reducing that to between 10 and 15 per cent (its illustrative example uses 12 per cent), there is a huge gap opening up between current demand and future supply. It's a gap that the Government, not least for political reasons, must address.

One tool that has been canvassed, and will almost certainly be part of the mix, is to let KiwiSavers access not only their own and their employer's contributions but also some or all of the Government's contributions. It will have a limited impact, lifting some borrowers above either the 5 per cent or 20 per cent threshold and out of the bank's "rationing zone".

But a far more potent option would be to expand the existing Welcome Home Loan (WHL) mechanism, which allows low or no-deposit lending, guaranteed by the Government. In its first 10 years the scheme has seen total lending of about $1.8b - less than $200m a year - and this Government reduced its funding.

Under its current rules the size of a WHL is limited and there are upper income limits to qualify - $85,000 for two- income households or $120,000 for three incomes.

Increasing the loan amount, lifting income thresholds and beefing up funding (which need not be huge given it is essentially an insurance cost to the Government with few defaults) would have a much bigger impact.

The Government will need to be careful not to over-egg the mix, given it transfers risk of loan default from the banks to taxpayers.

That has already been recognised in the framework publicised by the Reserve Bank, which specifically exempts Housing New Zealand's mortgage insurance scheme, including WHL, from the rationing formula (along with refinancing and bridging loans on existing high LVR borrowing).

No risk to the banks, no threat to banking stability and therefore no reason for the central bank to be worried? And at minimal cost to the Government. A solution made in political heaven, you'd think.

- The Dominion Post

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