Reserve Bank plans tighter lending restrictions

See also: Reserve Bank’s proposed new LVRs pave the way for interest rate cuts

The Reserve Bank plans to roll out tougher lending restrictions across the nation from September in an effort to mitigate the risk the country's rapid house price growth poses to the wider financial system.

The central bank wants to cap bank lending to property investors with a deposit of less than 40 percent at 5 percent and restore the 10 percent limit for owner-occupiers wanting to take out a mortgage with a deposit of less than 20 percent, according to a consultation paper released today. The property investor loan-to-value ratio restriction is an extension of the existing restraint in Auckland, which has a lower deposit threshold of 30 percent. Existing exemptions, such as loans for new dwellings, would stay.

"LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks' exposure to riskier mortgages," governor Graeme Wheeler said. "This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand."

Earlier this month the Reserve Bank signalled new restrictions could be in place before the end of the year as it balances the strength of the New Zealand dollar in keeping imported inflation subdued against low interest rates stoking demand for housing.

The bank will give an unscheduled economic update on Thursday, which investors are predicting will see Mr Wheeler try to talk the kiwi down and perhaps pave the way for a rate cut next month. The kiwi dollar dropped from just over 71c to 70.5c against the US dollar after the announcement.

The central bank is seeking feedback on the proposed measures, with the consultation set to close on August 10.

It anticipates the extension of the LVR restrictions will reduce house price inflation by 2 percent to 5 percent, and cut sales by 5 percent to 15 percent.

The Reserve Bank is still considering introducing a debt-to-income (DTI) ratio, which the consultation paper says would be complementary to the LVR restriction "by further mitigating housing credit risk" and is also looking at tougher capital requirements for lenders.

"Although the Reserve Bank will continue to investigate the case for using a DTI restriction and/or a capital overlay in the future, the increasing over-valuation in the housing market and rapid increases in investor debt suggests it is desirable to change the LVR policy in the interim," the paper said.

Mr Wheeler said his early discussions with Finance Minister Bill English on the DTI limits had been "positive."

RAW DATA: Reserve Bank has published a consultation paper outlining proposed changes to its LVR policy for registered banks, including proposed revisions to BS19 of the Banking Supervision Handbook . 

See also: Reserve Bank’s proposed new LVRs pave the way for interest rate cuts

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