Property sales halt feared after curbs

Press, 10 November 1983, Page 1

Property sales halt feared after curbs

Regulations introduced yesterday to control mortgage rates may bring the property market to a standstill, according to the national president of the Real Estate Institute, Mr Trevor Johnston.

Maximum rates of 11 per cent on first mortgages and 14 per cent on second and subsequent ones have been imposed. They apply to new loans now and will apply to others as they come up for review.

The Prime Minister, Mr Muldoon, announced the regulations at a press conference after a special Cabinet meeting yesterday (details, page 3). The regulations take effect from today, and will remain in force until February 29, when the wage and price freeze is due to end.

Mr Johnston said that “vast sums of money could be taken out of the mortgage pool,” seriously eroding the traditional New Zealand aspiration toward home ownership. Unless other areas of investment were similarly regulated, private lenders would be chased off by the low returns depleting the funds available to homebuyers, he said. The president of the Law Society, Mr Bruce Slane, said, “I expected it would happen, but I was surprised by the level.” He said people wanting to borrow for risk enterprises were likely to have most difficulty, as the prime rate was unlikely to fall below 11 per cent.

The amount of solicitors’ trust fund money lent for housing was lower than popularly supposed, and the “packaging” of loans from banks and institutions meant that their real rate was often close to that charged by lawyers. The Law Society, he said, opposed regulations because their arbitrary nature tended to produce injustices and distortions. Mr Johnston said that the more conservative would stay in the mortgage market because of the giltedged security it offered, but only after some hesitation and then on different terms.

“A proportion will turn to shares but risk money attracts only certain people, and all the widows with their husband’s superannuation will probably hold back in the short-term but stick to property,” he said. However, Mr Johnston predicted that they would be reluctant to commit their capital to the custom-

ary three-year mortgage term, especially with the wage-price freeze due to be lifted at the end of February. Instead they would offer loans repayable after 12 months, creating extra refinancing costs for the borrower, and, if credit was tight at the expiry date, a rash of mortgagee sales might result, he said. Labour’s spokesman on finance, Mr Roger Douglas, forced a snap debate in Parliament yesterday and said that the regulations

would result in less money for housing. (Report, page 6.) He also said that lenders would adopt “more shady practices” to avoid them. The reaction from the other political parties was equally critical. The New Zealand Party’s spokesman, Mr Bob Jones, said that new home construction, the building, and real estate industries would suffer as financiers rushed into equity investment. “Interest rates will not fall. They simply won’t exist. There will be an al-

most total absence of mortgage funds,” he said. The chairman of the party’s steering committee, Mr J. H. F. Macfarlane, said that there would be an explosion in interest rates when the constraints were lifted, and that many people would get hurt in the process. Social Credit’s leader, Mr Beetham, said the Prime Minister’s jawboning attempts to bring rates down had failed, and he was now shamed into action.

For months Mr Muldoon had been insisting that interest would follow inflation down and that the regulations were an admission that he had “got it all wrong,” said Mr Beetham. Government borrowing of billions of dollars had pushed interest rates through the roof; he said. “The fact that the rates applying on the. latest tender for Government stock were so much higher than the Prime Minister’s 8 per cent guideline is proof enough of that.” The executive director of the Finance Houses’ Association, Mr K. W. Baker, said that a black market would develop in mortgage money because the institutional .lenders would be unable to meet the demand for funds. Statements from other financiers endorsed his prediction that traditional sources of funding might be depleted as a result of the regulations.

The Canterbury Savings Bank was forced to lower its rates to comply with the new requirements. It had been letting first mortgages at 12.75 per cent and second about 15.25 per cent. The general manager, Mr Frank Dickson, said yesterday that the constraints were “unfortunate” as interest rates had been dropping anyway. He said that the C.S.B. had been looking to further reducing its rates early next year and that the Government’s regular interference in the market made business planning exceedingly difficult. The impact of the regulations would depend on whether the public was prepared to accept a corresponding drop in the interest paid on savings or whether it chose to spend instead, he said. “The bank’s lending ability is based on the deposits it receives. You can talk 11 per cent mortgages until you are blue in the face but nobody will get them if we have no funds to lend,” said Mr Dickson. His views were echoed by

the joint managing director of the United Building Society, Mr Colin Jenkins, who predicted a flow of funds from the mortgage market to other areas of investment. He said that the society’s immediate reaction to Mr Muldoon’s announcement had been to suspend all first mortgage ' lending until things had settled down. The regulations would have a significant effect on the U.B.S. which had been charging between 12.5 and? 14.5 per cent on first mortgage and about 16 per cent on second, he said. The president of the Building Societies’ Association, Mr Roy Broad, of Dunedin, said that the regulations would put new borrowers in a favoured position compared with people holding existing mortgages. He said that the matter would be discussed at a meeting of the association’s national executive today. The chairman of the Life Offices’ Association, Mr lan Stanwell, said that it was disappointing that the Government had seen fit to take the action as his organisation’s members had co-oper-ated voluntarily to lower interest rates. “We believe it would have been better to let the market find its own directions and levels at its own pace,”,, he said. •’?

The president of the Canterbury Master Builders’ Association, Mr Bill Harrison, said that the regulations would not help the building industry. “We need stability, and to change the rules more than once a month is a little disturbing,” he said. Others, however, , responded more favourably.

Federated Farmers’ president, Mr W. R. Storey, said that the move would be welcomed by all landowners and prospective buyers who

until now had had their transactions held up because of the gap between market' rates and Rural Bank approved rates. He regretted that private sector reluctance to reduce interest charges in line with inflation had forced the Government to impose regulations. “The comparative true return on money invested is still high and farmers will be expecting a further downward movement in rates over the next six months,” Mr Storey said. • The manager of Merritt Homes, Ltd, Mr Alec Fairweather, said that the company was happy with the move because it made second mortgage finance available at 14 per cent, the limit imposed by the Housing Corporation as a condition of lending. The president of the Canterbury and Westland branch of the Real Estate Institute, Mr J. N. Grant, also applauded the regulations. He said that they would keep the inflation rate down and that that was the main thing. “Even at 11 per cent and 14 per cent, we are still paying a big interest rate compared with other countries in the world,” Mr Grant said, and cited a recept case where a friend of his had raised a first mortgage at 8 per cent in the United States. Mr Garry Tait, president of the Employers’ Federation, said that the Government decision to reduce mortgage interest rates would stimulate house building and encourage investment in other activities. “Reducing interest rates will boost confidence in the private sector, reduce costs, and provide jobs although the full effects will not be immediately visible,” he said.