The Reserve Bank is loosening the ‘speed limits’ on high loan to value ratio lending and says further relaxation of the rules is likely in future

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Adrian Orr by Jacky Carpenter.

By David Hargreaves

The Reserve Bank has decided to further relax the rules around high loan to value ratio (LVR) housing lending in a highly anticipated move that should provide a boost for the housing market.

The move was announced on Wednesday as part of the bank’s latest Financial Stability Report

From 1 January 2019:

  • Up to 20% (increased from 15%) of new mortgage loans to owner occupiers can have deposits of less than 20%.
  • Up to 5% of new mortgage loans to property investors can have deposits of less than 30% (lowered from 35%).

This is the second such loosening of the LVRs – which were originally introduced in 2013 – that the RBNZ has implemented. It’s pretty much identical to what the central bank did in its FSR in November 2017, which then entailed raising the so-called speed limit for owner-occupier loans from just 10% of new bank lending to 15% from January 1 this year. The investor restrictions were eased from a requirement for 40% deposits to just 35% deposits.

The lending data in subsequent months after the January easing suggested that the relaxation of the rules did have a somewhat stimulatory impact on the market.

The moves to loosen the rules for owner-occupiers will be especially welcomed by first home buyers. However, the decision to also relax the rules for investors – which were a key part in reining in the housing market after they were introduced in 2016 – may be seen as more contentious and risky.

In making the announcement on Wednesday, RBNZ Governor Adrian Orr said risks to New Zealand’s financial system had eased over the past six months (since the last FSR), but vulnerabilities persist. In particular, households remain exposed to financial shocks due to their large mortgage debt burden.

“However, both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending.

“In response, we are easing our loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained we expect to further ease LVR restrictions over the next few years.”

ASB chief economist Nick Tuffley indicated he was a bit surprised that the RBNZ had also decided to loosen the rules for investors, as well as the owner-occupiers.

“The housing market has been at an interesting juncture recently.  Sales turnover and listings rose sharply in October.  A beat-the-foreign-owner-ban rush was one probable reason in some parts of the country. 

“But mortgage rates have been falling for months, with sub-4% rates now available to borrowers with 20% equity.  House price growth has been strong in a number of provinces and been accelerating in some. 

“So relaxation of the LVR restrictions is not without some risk, even though Auckland risks are slowly dissipating through a sustained period of flat prices.”

ANZ senior economist Liz Kendall said the LVR loosening was “modest”.

“We anticipate that this easing will boost the housing market, but only a little, with the restrictions remaining ‘tight’ overall. 

“…We expect that further easing will occur in time, but that the RBNZ will continue to tread cautiously. Household debt and house prices remain high and the risk of resurgence in the housing market cannot be ruled out, given low mortgage rates and still-strong population growth. Any improvement in vulnerability metrics will continue to be a slow grind, short of a fundamental change in market conditions.”

This is the RBNZ media release:

Risks to New Zealand’s financial system have eased over the past six months, but vulnerabilities persist. In particular, households remain exposed to financial shocks due to their large mortgage debt burden.

However, both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending. In response, we are easing our loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained we expect to further ease LVR restrictions over the next few years.

Debt levels also remain high in the agriculture sector, particularly for dairy farms, implying ongoing financial vulnerability. Balance sheets need to be further strengthened. In the medium-term, an industry response to a variety of climate change-related challenges appears likely, requiring investment.

While domestic risks have eased, global financial vulnerability has risen. Significant build-ups in debt and asset prices, and ongoing geopolitical tensions, overhang financial markets. This vulnerability is highlighted by the current elevated price volatility in equity and debt markets. New Zealand’s exposure to these global risks has reduced somewhat, as New Zealand banks have become less reliant on short-term, and foreign, funding.

The domestic banking system remains sound at present. We are using this period of relative calm to reassess whether the banking system has sufficient capital to weather future extreme shocks. Our preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient. We will release a final consultation paper on bank capital requirements in December.

The banking system remains profitable, reflecting banks’ low operating costs and strong asset performance. While positive overall, banks’ low costs have been partly achieved through underinvestment in core IT infrastructure and risk management systems in New Zealand. This was highlighted in our review of bank’s conduct and culture with the Financial Markets Authority. We will be jointly reviewing banks’ responses to our review in March 2019, and following up as required.

CBL Insurance Ltd was placed into full liquidation by the High Court on 12 November. Aside from CBL, the insurance sector as a whole is meeting its minimum capital requirements. However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions. Our ongoing review of conduct and culture in the insurance sector with the Financial Markets Authority will illuminate the industry’s risk management capability. The review will be released in January 2019.

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