Ordinary Kiwis will bear the brunt of RBNZ’s borrowing policy

hamerIntentions by the Reserve Bank of New Zealand (RBNZ) to force banks to hold more capital for people with a less than 20 per cent deposit towards a mortgage will only hurt ordinary Kiwis.

It would appear that by forcing banks to hold an extra 12 per cent of capital for backing mortgage lending from 30 September 2013, the RBNZ is trying to curb high loan to value ratio (LVR) mortgages above 80 per cent.

It is difficult to gauge how the banks will react to the RBNZ’s move, but they might move to restrict borrowings above 80 per cent, or by increasing the cost of borrowing through higher interest rates or higher insurance premiums (low equity fees).

However, Banks already insure over 80 per cent borrowing by charging a low equity fee or higher margins on interest rates.

Being here on the ground in Auckland, it appears that the escalating house prices are due partially to overseas cash buyers and any bank reaction to the move by the RBNZ, will not affect them at all.

Effectively it just makes it harder for the average Kiwi to get into a home. The RBNZ’s move will affect first time home buyers or lower income earners if they have limited deposits, unless they have family who can assist with gifting funds or providing additional property security.

Of course there are other options for people with higher incomes, including borrowing against the shortfall of deposit from elsewhere.

At the end of the day, those with limited deposit, average incomes and no family to assist will be shutout of home ownership.

Clearly the RBNZ thinks it can curb the demand for housing. I am not sure that the suggested methods will do this, but will certainly open the market further to cash buyers.

It may reduce the competitive demand for houses and ultimately the soaring prices, but that then exposes the banks to the risk of the existing highly leveraged properties from a market with falling prices.

Perhaps the only real way to curb the soaring prices is to limit property ownership to those with New Zealand residency.

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