Reserve Bank delays LVR implementation by one month

The Reserve Bank will give the country's banks an extra month to implement system changes required to impose new lending restrictions on Auckland residential property investors.

In its responses to submissions on new LVR restrictions that were to have applied from October 1, the central bank said it was giving banks an extra month, until November 1, to start complying with the new regime. The rules are the second macro-prudential policy initiative aimed at house price inflation by the Reserve Bank and will cost banks an estimated $10 million to implement. 

The new loan-to-value ratio rules, aimed specifically at lending to the overheated Auckland residential real estate market, mean borrowers will generally need a 30% deposit for mortgage loans secured against Auckland rental property.

It has also relaxed a proposed 2% 'speed limit' the proportion of high-LVR lending in which banks would be allowed to engage, to 5% for Auckland residential investor lending at LVRs above 70% after feedback that 2% was overly restrictive.

The October 2013 restrictions imposed a 10% 'speed limit' on lenders writing residential mortgages with a deposit of less than 20%. The Reserve Bank intends to keep that limit in Auckland, while relaxing it to 15% outside the country's biggest city to recognise more subdued housing markets elsewhere.

Last week, ratings agency Standard & Poor's said the rapid escalation in Auckland house prices was a threat to New Zealand's major lenders in the unlikely event of a sharp downturn, which would weigh on all of the nation's financial institutions due to the importance of the city to the wider economy.

In a report summarising its responses to submissions on the changes, the Reserve Bank said it will formally review its use of LVRs every six months in its Financial Stability Report, and has decided to go with the most restrictive approach to the new regime.

"We consider overall that it is appropriate to harmonise on a system where customers are placed in the most restrictive relevant category," the bank said on whether or not to allow loans to be apportioned against their quality of collateral.

While this might lead to some incentives for borrowers to split their banking arrangements, the likelihood was judged to be rare.

"The calibration of the policy is designed to ensure that most investors in the Auckland market are providing substantial deposits to reflect the elevated risks associated with the current Auckland house market pressures," it said.

(BusinessDesk)