Reserve Bank Ignores The Law Of Unintended Consequences

Announces LVR restrictions for Auckland investors; must have  30% deposit; LVR relaxed outside of Auckland

The announcement today  by the Governor of the Reserve Bank Mr Wheeler, has one simple aim in mind.
To “shock” investors and the public in general into believing that these new rules will dampen the property market.

It will do just the opposite and I predict the “shelf life” of the suggested new rules  will be less than 30 days.


There will be unintended consequences which will play right into the hands of investors to the detriment of the ordinary first home home buyer and to the renters.


The problem is that the academics who dream these ideas up have no idea how these rules will work, relying on text book theories and not on practical solutions, let alone getting advice from experts in the market.

I have genuine sympathy for the Governor and his task to keep economic stability and it’s true that the Auckland market is frothy and needs settling down..but by force?
Let us look at some of the  “rules” the Governor wants to introduce:

  1. 1.The new rules will come into affect on 1st October effecting the Auckland City area only.  That gives investors plenty of time to re arrange their affairs, and to buy more properties.

2. There will be a “discussion paper” introduced by the Governor for input in the meanwhile and I will bet that by the time that discussion paper comes out the other end there will be more holes in it than a slice of Swiss cheese.

 3.  The proposed 30% deposit rule will not affect two thirds of the market, the Mums and Dads selling their homes, who will continue buying and selling free from any hindrance thus setting the price for property as they have been doing all along .

 4.   The biggest affect will be to push investors into the provinces where prices are much more reasonable. If you are living in Hamilton, Huntly, Mercer, Cambridge , Tauranga, Thames and all the other  areas North and South of Auckland City you might be either getting very nervous or gearing up for a bonanza.  
The good Governor has even raised the amount allowed by banks for lending in these in these areas from 10% to to 15% so look around and take note.              
There could well be a wave of investors heading out of Auckland to a place near you.

5.  Another effect could well play right into the hands of investors with rental property. One of the reasons that Auckland rents are still so reasonable is that investors are providing large amounts of rentals which keeps prices down. If investors withdraw from the Auckland market, the long term effect will be fewer houses to rent and higher rents as a result.
Those investors who hang in may soon thank the Governor for his foresight and generosity.

6.  No doubt investors will now form partnerships using group assets and leveraging in combination so as to continue buying up big so long as the market stays hot.

7.  Second Tier lenders will have a field day.
Already several have appeared and announced their willingness to top up any shortfalls in deposits or even provide 100% finance.
This is exactly how the old Finance Companies got started in the 1960’s and 70’s when harsh lending distorted the market at the time ( I know I was there).
Has no one learned anything from the collapse of the Finance companies only a few years ago?

8. An interesting question will be what or who is an “investor” .
If Mum and Dad decide to buy an investment house so their solo Mum daughter and two kids can have some where to live, will they be classed as investors?
Likewise if the same Mum and Dad want to buy a city pad for work convenience, will that be an “investment” as well ?

9. There is of course there is the small matter of the overseas buyers (Asians as they are commonly classified as). These people don’t need our local banks.
They can borrow all they went from their local banks at almost zero percent.
They will have even less competition than before, and for them the new rules will hardly tinkle the tea cups.

10. It is also interesting to note that commercial property is not mentioned, and as that field of investment is on the boil already it could get hotter yet.

11.  What happens to those who have an equity of less than 30% now? If their mortgage needs rolling over will it be renewed by their lender or will it cause a problem?


This is how I see it playing out. So long as the market remains strong, there will be countless ways investors will get around the rules.

That would be  a shame as bad rules make a mockery of order and good business.


Best summary from Mike Hosking:
Olly Newland

Posted in News & Articles | 3 Replies

3 thoughts on “Reserve Bank Ignores The Law Of Unintended Consequences

  1. I agree with your thoughts Olly, it normally distorts the market when you make these types of changes and I am sure the RBNZ is not hitting the appropriate target. The irony is the government is looking at selling off their social housing stock to Housing Providers, the domestic investors in Auckland are also Housing Providers, providing a much needed product in the area so why target them. The other matter to consider is; “The new asset class will take effect from 1 October 2015 for new lending, with a further phase-in period of nine months for the reclassification of existing loans.” This will cause some stress to some and opportunities to 2nd tier lenders. As always when changes are made, opportunities will abound.

  2. All very good points Olly. You mentioned the provincial cities will be doing better out of this. NZ has mortgage money chasing a home. Here in Nelson we are already seeing some Auckland money flowing into our housing market. This must only increase. The banks will be able to lend to more people under the 20% LVR in the provinces. I just wonder if we will see banks starting to offer attractive loan packages to areas outside of Auckland. This is just like the great plague. Stamp it out of London and it will spread to the hinterlands.

  3. So if investors withdraw from the market, does the house grow its own legs and move out from auckland? No… A would-be tenant moves in…

    I’m an investor myself owning 5 properties in auckland. I feel the auckland market is becoming a joke and neither the government or reserve bank are doing enough to help ordinary folks to get ahead. Every time they try to intervene lobby groups and interest party throw in things like ‘unintended consequences’. I would appreciate a more balanced analysis from you in future

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