RBNZ's new loan restrictions postive for banks' books, Fitch says

The Reserve Bank's plans to rein in mortgage loans to Auckland property investors should help support lenders' balance sheets and insulate them from a sudden downturn, Fitch Ratings says.

The global rating agency said the central bank's new macro-prudential rules, which are expected to come into effect on Oct. 1, are "credit positive" for local lenders. The Reserve Bank yesterday announced plans to prevent private banks from lending to Auckland property investors with a deposit of less than 30 percent of a property's value as it seeks to dampen down a raging market in the country's biggest city. The Reserve Bank also plans to introduce property investment loans as a new asset class that would require lenders to hold more capital against them.

"The combination of these measures should help to provide greater protection for banks against major losses in the event of a sharp house-price correction and/or rapid rise in unemployment or interest rates," Fitch said in a statement.

The Reserve Bank yesterday said the potential for a sharp correction had increased since its November financial stability report, with investors the key source of demand driving up Auckland house prices, accounting for about a third of new lending in the six months ended March 31.

Reserve Bank modelling predicts the new restrictions will cut Auckland property transactions by between 8 percent and 10 percent, and slow house prices in the country's biggest city by between 2 percent and 4 percent.

Fitch said the Reserve Bank's plans differ from the Australian Prudential Regulatory Authority's actions to cool down strong growth in investor mortgage portfolios, which has sought to manage risks on a bank-to-bank basis.

"Both approaches - from the RBNZ and APRA - are likely to reduce risk within bank mortgage portfolios," Fitch said. "However, it is unclear which will be more effective in limiting potential losses from a sharp property-price correction, as neither market has experienced a significant housing downturn."

The Reserve Bank imposed its original limits on mortgage lending with deposits of less than 20 percent in October 2013, which was seen as initially taking the heat out of the market. Since then, house prices have picked up as strong inbound net migration and a lack of supply in Auckland have been exacerbated by relatively low interest rates.

To recognise more subdued housing markets outside Auckland, the Reserve Bank will ease the restrictions on high-LVR lending for all residential lending to 15 percent from the existing 10 percent. For Auckland owner-occupiers the 10 percent speed limit will stay in place.

The new restrictions on Auckland lending won't apply to mortgages to build new houses or apartments.

The Reserve Bank will issue a consultation paper later this month seeking feedback on the new proposals.

(BusinessDesk)