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Banks take initiative to reduce home lending risks

Opinion Piece

Prime Minister John Key has returned from a largely disappointing trip to Fiji to a surprise on the home front. While he was away, three major banks decided to stop making housing loans to foreign buyers. The question now is whether this is a sign the housing bubble might soon start deflating, or burst.

Key would not have expected much more than the frosty reception he got from Frank Bainimarama on the first visit by a New Zealand Prime Minister for 10 years. The only thing they seemed able to agree on was a love of rugby.

But along with most economists in the country, he would have been taken aback by the decision of Westpac, ANZ and then the BNZ to stop lending to non-resident property buyers.

The Government has long claimed that foreign buyers are not a significant presence in the New Zealand housing market.

While that is still moot, what the banks acknowledged with their moves last week is that homebuyers borrowing based on foreign income are more risky for them — especially if there is a significant market correction.

Reserve Bank figures show that 46 percent of property sales in Auckland are to investors. It is significant that Westpac has also reduced the allowable loan-to-value ratio from 85 to70 percent. Discouraging investment buyers would have at least as big an effect on the overheated market as making it harder for foreigners to buy here.

They banks are following decisions already taken by their parent banks in Australia. It shows their concern that overheated property markets in both countries could be headed for a crash.

For National, of course, a sudden fall in house values would be bad news. Its goal, shared by the Reserve Bank, must be for a soft landing — but that is not going to be straightforward.

And now he is back John Key might be wise to have a word with his son Max and tell him that being photographed in his underwear with a cigarette in his hand was not a good idea. Max will hopefully be more amenable than Frank Bainimarama.