RBNZ to scale back lending restrictions as housing market slows

The Reserve Bank will ease restrictions on low-equity mortgage lending from next year as housing market pressures abate after several years of policy efforts to cool rapid house price gains and their accompanying credit expansion. 

Acting governor Grant Spencer today announced plans to start removing the limits on high loan-to-value ratio property lending, which were first imposed four years ago to discourage banks from extending credit to riskier borrowers. From Jan. 1, up to 15 percent of a bank's new lending can go to owner-occupiers borrowers putting down less than a fifth of the price for a deposit, up from the original 10 percent lending cap. Property investors will also get a break, with 5 percent of new mortgage lending allowed at a 65 percent LVR, up from a 60 percent limit. 

"Over the past six months, pressures in the housing market have continued to moderate due to the tightening of LVR restrictions in October 2016, a more general firming of bank lending standards and an increase in mortgage interest rates in early 2017," Spencer said in a statement. "The bank will monitor the impact of these changes and will only make further LVR adjustments if financial stability risks remain contained. A cautious approach will reduce the risk of resurgence in the housing market or deterioration in lending standards."

The central bank also said reduced demand from foreign buyers "may have also tempered demand." The government today announced tougher requirements on foreign buyers of rural land in a move that follows the decision to ban the sale of existing residential homes to overseas buyers.

The LVR restrictions were part of the Reserve Bank's macro-prudential tool-kit, introduced as a means to address imbalances in the broader financial system without resorting to monetary policy, which is often described as a blunt tool. The central bank found itself with competing tensions as rising house prices fuelled riskier credit expansion, while at the same time subdued inflation prevented the governor from hiking rates. 

ASB Bank chief economist Nick Tuffley said the relaxation of the rules came earlier than anticipated, but were modest and indicated further easing will be incremental. 

"This initial LVR easing is likely to contribute to a stabilising in 2018 of the mild price falls seen in Auckland and Christchurch, though we would still expect price growth in other regions to flatten off," Tuffley said in a note. "We don’t expect the eased restrictions to spark a return to strong house price growth."

Bindi Norwell, the chief executive of the Real Estate Institute, says she's surprised and concerned that the LVR restrictions will remain the same level (20%) for first time buyers.  "For some months now, the institute has been calling for a review for first time buyers to make it easier for them to get a foot on the property ladder.

“We constantly receive feedback from our members around the country that for many young couples, saving a 20% deposit is just too much for them - especially when they’re already paying rent. With a median house price of $530,000 in New Zealand, this means a deposit of $106,000 is needed. In Auckland, with a median house price of $850,000, this is a deposit of $170,000."

Financial stability

The new policy was released with the central bank's six-monthly financial stability report, which found the country's broader financial system remained sound with the banking system maintaining adequate capital buffers to protect against a severe economic downturn. 

The Reserve Bank noted house prices had moderated through the loan-to-value ratio restrictions and tighter lending criteria adopted by banks, and said the government's policy programme will probably reduce demand while boosting supply. 

"On balance, housing market conditions are likely to remain subdued for some time, and this is likely to see the gradual reduction in housing market risks continue," the report said. 

Since the LVR limits were first introduced, the share of low-equity loans on banks' mortgage books shrank to less than 8 percent in September this year from 80 percent in October 2013. The Reserve Bank estimates the reduction in highly-leveraged home loans would mean default rates would be about 10 percent lower if there was an economic slowdown and banks' credit loss rates would be about 20 percent lower. 

(BusinessDesk)