By Gareth Vaughan
Setting limits on residential mortgage loan-to-valuation ratios (LVRs) wouldn't resolve housing affordability issues nor cool a heating Auckland housing market, BNZ CEO Andrew Thorburn says.
The Reserve Bank is researching the potential introduction of LVR limits along with three other so-called "macro-prudential tools" that it could implement in an attempt to clamp down on frothy asset prices and credit booms.
Thorburn told interest.co.nz that although the LVR issue is an interesting one, housing comes back to supply and demand, especially in Auckland.
"Because the population is growing, and because particularly there's high demand at the say sub million dollar end, that demand is strong and is going to keep growing as more net migration comes in," said Thorburn.
"Let's say there is somebody who has got 10% equity, we do that sort of lending particularly for people who have got high cashflow. But let's say we couldn't do that. It (the house they wanted to buy) would just be purchased by an investor because people have to live somewhere, so the underlying demand's not going to change. It (the change) is just who buys it."
"So to me this comes to the issue of 'let's diagnose this properly' and I think one of the biggest issues is the supply issue. Because demand is high and rising and supply isn't keeping up with it. So whether it's group A that buys, or group B or group C, it's going to be filled by somebody," added Thorburn.
Banks growing mortgages with 80% to 90% LVRs
Three of the big four banks - ANZ, ASB and Westpac - have so far issued General Disclosure Statements covering the September quarter. All three show lending in the highest LVR category, above 90% meaning borrowers have a deposit of less than 10%, falling. However, all three grew home loans in the 80% to 90% LVR category where borrowers have deposits of between 10% and 20%. The same trend was on show at Kiwibank with 90% plus LVR residential mortgage lending down, and 80% to 90% lending up.
Reserve Bank Deputy Governor Grant Spencer said in May the central bank and prudential regulator of banks saw four instruments as "viable candidates" as macro-prudential policies to help reduce financial system risk. These are; 1) A Counter Cyclical Capital Buffer, which is an additional capital requirement that local bank supervisors may apply in a credit boom, and remove when the cycle is turning down. Such a buffer is part of the Reserve Bank's Basel III plans, which the banks are comfortably placed to meet, and will be in in place from 2014.
2) The Core Funding Ratio. Introduced in April 2010 as a move designed to reduce New Zealand banks' reliance on short-term overseas borrowing, this sets out that banks must secure at least 70% of their funding from either retail deposits, or wholesale sources such as bonds with durations of at least a year. Currently the Core Funding Ratio is set at 70%, but will be lifted to 75% from January 1, 2013. The banks are comfortably placed to meet the increase.
3) Adjustments to risk weights on sectoral lending (such as to the agricultural or residential mortgage sectors) used to calculate Risk Weighted Assets under the Basel capital adequacy regime.
4) Limits on LVRs.
'Macro-prudential policy in its infancy'
In its Financial Stability Report last month the Reserve Bank said research was continuing into numbers two, three and four above. It said temporary LVR restrictions could be used to address rising imbalances associated with rapid lending growth to specific sectors such as housing.
"While such instruments have the advantage of directly targeting sectors where systemic risk is building, they may also pose risks in terms of financial system efficiency and disintermediation (shifting lending towards entities not captured by the regulation). Internationally, macro-prudential policy is still in its infancy, and it remains to be seen which instruments become prevalent," the Reserve Bank said.
"The Reserve Bank is reasonably advanced in its macro-prudential policy development, and is drawing on the experiences of other countries as it refines its framework. As part of this process, consultation on the remaining aspects of the macro-prudential framework will be undertaken in due course."
The Financial Stability Report said decisions on macro-prudential interventions would require a considerable degree of judgement.
"The Reserve Bank considers that current conditions in credit markets do not warrant any macro-prudential intervention...While the Reserve Bank is the organisation primarily responsible for macro-prudential decision making, consultation with other key stakeholders such as the Treasury is an important part of the broader decision making framework. The Reserve Bank is currently working with Treasury and the Minister of Finance (Bill English) on specific aspects of macro-prudential governance and accountability."
Neither Bollard, Wheeler nor Key keen on LVR restrictions
Despite Reserve Bank staff looking into the possible use of LVR restrictions, all of recently departed Reserve Bank Governor Alan Bollard, his successor Graeme Wheeler, and Prime Minister John Key, have poured cold water on their likely use by the central bank to cool an overheating housing market.
Meanwhile, Thorburn said if you look at bank losses from loans gone sour over the last five years across housing, credit cards, small business, agriculture, corporates and commercial property, housing losses would be the lowest.
"The banks are not going to take excessive risk here and lend to all sorts of people who can't afford it for the sake of making profit. It just doesn't make sense," said Thorburn. "You're trying to build a long-term business and I think we've made good decisions because the write-offs are very, very, very low."
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