PROPERTY NEWS

The windsof change

BY SALLY LINDSAY

Housing market won’t be rescued by CCCFA changes

Kiwibank senior economist Jeremy Couchman says there are bigger forces at play on the housing market than just the Credit Contracts and Consumer Finance Act (CCCFA), such as rapidly rising inflation both here and abroad.

Both Omicron and the war in the Ukraine are impacting inflation, he says.

“Omicron is pushing up domesticgenerated inflation in an already capacity-constrained economy. Meanwhile the war has seen commodity prices such as oil surge.

“The Reserve Bank’s fight to rein in inflation is likely to see mortgage rates rise further and they are already being adjusted upwards to this new reality,” says Couchman.

The CCCFA’s proposed changes include removing regular 'savings' and 'investments' from would-be borrowers' expenses, which are measured against their intended loan.

The changes also reduce the need for lenders to comb through bank statements of all borrowers – an apparent reference to the notorious KFC, McDonald’s and Christmas shopping expenses which in some cases were used by banks to decline mortgages.

The changes come part way through a review of the CCCFA by MBIE officials on behalf of the Financial Regulators Council - and there is suspicion Commerce and Consumers Affairs Minister David Clark announced some of the changes early because there is an election next year.

Far-reaching changes

The managing director of mortgage broking company AdviceHQ, David Green, agrees with Kiwibank that there is more than just the CCCFA at play for borrowers.

“A lot of changes were made from the middle to the end of last year that have had far reaching effects on the housing market and are big impediments for most borrowers: LTRs (loan to value ratios), tax, and banks using DTIs (debt-to-income ratios), even though they have not been officially introduced by the Reserve Bank.”

Green says these changes are helping to up-end up the housing market and are not being unwound.

“Interest rates and inflation are also in play, making it even tougher.”

While the proposed CCCFA changes are a step in the right direction, and hopefully lead to more common sense lending for mortgages, Green says he has seem little detail, and that it remains to be seen whether the onerous liabilities on bank and other lenders’ directors and managers will change.

“All I have seen is a couple of bullet points and not much else.”

He says the concern is all about the detail: banks’ approach to the changes and the timing of them.

“If the Minister doesn’t change the liability for directors and senior managers to put in place methods for identifying any deficiencies in the effectiveness of CCCFA compliance procedures, or face fines of up to $200,000, the changes might not work.”

The timing of Clark’s announcement on the changes came quicker than expected, says Green.

“It is a red flag. There is an election coming up next year.”

While the CCCFA is causing more difficulty for banks, Green hopes the proposed changes will avoid a credit crunch.

CCCFA changes positive, but investors nervous

Property Investors Federation chief executive Sharon Cullwick says the CCCFA changes will be good for investors and all borrowers.

“The devil is in the detail and that hasn’t been revealed.”

Cullwick says investors are waiting until the market turns and the CCCFA rules are loosened, as there is not much in the way of yields being achieved. Costs are increasing rapidly.

The recent changes - the CCCFA, interest rate rises, LVR changes, and tax changes meaning property investors can no longer offset mortgage interest against rental income - stopped the Hawkes Bay Property Association’s 300 members in their tracks, for example.

“I don’t know of one investor buying at the moment.”

Westpac bank acting chief economist Michael Gordon says higher interest rates are here to stay. He says while lending regulations are likely to be less restrictive in the future than they have been to date, Westpac’s forecast is for house prices to fall by a combined 10% over the next two years.

Earning power should stop huge house price falls

Although the ANZ Bank now predicts house prices will fall by 10%, up from the 7% it forecast in January, it says its optimistic view is that any larger drop will be tempered by household incomes.

“We’re simply not forecasting a household income (employment) shock that would necessitate the forced sale of properties and exacerbate the downturn”, says Sharon Zollner, ANZ’s chief economist.

She says, however, that it is entirely possible the bank’s outlook regarding household incomes and broader economic momentum is too optimistic, and that the path towards taming inflation passes through a more marked economic slowdown than it is forecasting.

“This is where the Reserve Bank’s inflation-targeting grit may well be tested over the coming year or so. Higher interest rates mean stronger headwinds for the housing market.

“Given the strong starting point, we’d still call this a soft landing – something that’s quite evident when looking at the implied house price level.”

House prices still up a whopping 30%

The bank’s house price forecast still leaves house prices up a whopping 30% at December this year compared to December 2019, pre-pandemic. In that light, the bank’s relatively pessimistic forecast seems rather optimistic.

Relative to the past few business cycles, this time may be a little different for the housing market, says Zollner.

In the past, waning consumer demand - and a softening housing market - was likely enough to halt inflation pressures and for the Reserve Bank (RBNZ) to achieve its targets.

“This time, inflation has so much strength and persistence, the RBNZ will likely need to continue hiking despite softening housing and demand.”

If house owners think the RBNZ has their backs and will act to prevent house prices from falling too much, they may be unpleasantly surprised - if inflation remains well in excess of the 1-3% target band for too long, that is.

“It’s all uncertain, but we think this is a risk well worth outlining,” says Zollner. ✚