By Alex Tarrant
The government appears comfortable with the Reserve Bank's new tool kit to control property lending and is not planning to introduce more extensive Canadian-style controls which place limitations on borrowers with loan-to-value ratios (LVRs) above 80%.
Finance Minister Bill English was asked at the National Party's annual conference over the weekend whether limits like those in Canada were needed in New Zealand to avert another housing bubble.
English said the government already had the tools in place to deal with any future resurgence in household lending growth, which was currently "very small" (see chart below).
“I think we have all learnt form the last cycle, we don’t want to let the banks get carried away with large growth in lending. We have the tools to limit their ability to do that and those tools are in place and can be used when required," English said.
Those tools include giving the Reserve Bank power to set limits on loan-to-value ratios; tighten (or loosen) banks' core funding ratio requirements, which stipulate how much core funding banks must source from domestic and long-term sources; and introduce counter-cyclical capital buffers where banks might be required to hold more capital in times of a credit boom in efforts to dampen the credit cycle.
Read more here, where NZIER principal economist Shamubeel Eaqub told interest.co.nz the tools would need to be used together to be effective. Massey University banking lecturer Claire Matthews also said LVR controls could only be held in place for a matter of months before borrowers and lenders looked to find ways around them.
In June, Canadian Finance Minister Jim Flaherty announced new rules for Canadians with government-backed insured mortgages with loan-to-value ratios of more than 80%. Homeowners with LVRs under 80% would not be affected.
The Canadian Department of Finance outlined the changes on its website:
- Reduce the maximum amortization period to 25 years from 30 years. This will reduce the total interest payments Canadian families make on their mortgages, helping them build up equity in their homes more quickly and pay off their mortgages sooner. The maximum amortization period was set at 35 years in 2008 and further reduced to 30 years in 2011.
- Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes. This will promote saving through home ownership and encourage homeowners to prudently manage borrowings against their homes.
- Fix the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent. This will better protect Canadian households that may be vulnerable to economic shocks or an increase in interest rates.
- Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million.
Last week Westpac economists said it should not be ruled out that the Reserve Bank might move to control LVRs to cool down a recovering housing market next year.
"New Zealand could start looking a lot like Canada and Norway, where housing markets are frothy but the central banks are keeping interest rates low due to subdued consumer price inflation and high exchange rates," Westpac chief economist Dominick Stephens said.
"Canada recently resorted to unconventional tools to try to cool the housing market, including maximum amortisation periods for mortgages, loan-to-value limits on equity drawdowns, and requirements for borrowers to demonstrate that housing costs are no more than 39% of income," Stephens said.
"Is it possible that New Zealand could invoke similar unconventional tightening measures to cool an overheating housing market next year? We would not rule that out," he said.