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Reserve Bank reveals more detail on its plans for 'speed limits' on high loan to value lending

Property
Reserve Bank reveals more detail on its plans for 'speed limits' on high loan to value lending
<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

The Reserve Bank has released more details around its plans to put "speed limits" on high loan to value lending, but has stopped short of saying when such limits may be implemented.

Following the completion of a recent public consultation process the RBNZ only needs to give two weeks notice of the implementation of LVR limits. See here for articles on LVRs. 

The LVR limits are primarily seen as a way of the RBNZ helping to maintain financial stability. However, the central bank is also hoping they can be used to take heat out of the rising house market.

The Government, which initially - unsuccessfully - tried to get the RBNZ to exempt first home buyers from the LVR limits moved at the weekend to make it easier for first home buyers to get into houses.

In the wake of the consultation process the RBNZ has made some changes to its plans for how the LVR limits would be imposed.

And Deputy Governor Grant Spencer was warning today that "if" LVR restrictions are implemented, bank management and directors will be expected to "follow the spirit, not just the letter" of the restrictions.

"In particular, they will need to ensure that the policy is not avoided or undermined through innovative lending practices. We will be maintaining a close dialogue with the banks."

Spencer said that an issue raised through the consultation process was that of banks issuing mortgage borrowers with pre-approvals, which represent a firm commitment to provide housing finance and may be valid for up to six months.

Average rate over six months

He said some banks had indicated that they might be unable to meet a speed limit in the first few months of it being introduced due to the pipeline of pre-approved loans.

“To address this issue, we have decided that banks would initially be required to meet a speed limit on high LVR lending measured as an average rate over a six-month window. 

"Thereafter, the speed limit for banks with lending in excess of $100 million per month would apply to the average rate over three-month windows, as originally proposed.  However, we would expect the banks to modify their approach to issuing pre-approvals, in order to ensure that they fall within any speed limit on an ongoing basis.

“Banks with mortgage lending below $100 million per month will be required to meet the speed limit on the average high-LVR lending rate over six-month rolling windows, to reflect the greater volatility seen in their high-LVR mortgage lending."

ASB economist Christina Leung said the revised changes from the RBNZ were "broadly in line" with the proposal released earlier in June this year.

"The RBNZ has not set any specific levels – those will be determined if and when the policy is implemented. For indicative purposes, the RBNZ has shown in the conditions of registration a speed limit of 5% share for loans with LVR of over 90%, and a speed limit of 12% for loans with LVR of over 80%. These illustrations are the same as what was outlined in the consultation paper.

"In regards to avoidance measures some banks may take to bypass the restrictions, the RBNZ notes it could take action against the bank 'by varying the standard LVR conditions, imposing an additional condition relating to LVRs, or take some other form as appropriate'.

"It is pretty clear the RBNZ will be looking at the spirit of the restrictions when deciding whether a bank has breached the restrictions – this aspect is no doubt intended to make banks err on the side of caution."

Leung said theoretically, the RBNZ could give notice of LVR restrictions "from now on".

"On balance, we expect the most likely window is after the [RBNZ's} September [Monetary Policy Statement]  – up to and including the release of the November [Financial Stability Report] on November 13.

"It is also possible the RBNZ could use the MPS release to introduce the high-LVR restrictions, but the RBNZ has in the past separated out monetary policy from macro-prudential policy announcements.

The ASB expects the introduction of a speed limit on high-LVR lending will "only have a modest impact on house prices, and we will continue to see continued housing market pressures over the coming year". Leung said. The ASB is still picking the first lift in official interest rates in March 2014.

Here is the full release from the RBNZ:

The Reserve Bank today released its response to submissions (PDF 245KB) following its public consultation on the framework for restrictions on high loan-to-value ratio (LVR) residential mortgage lending. 

The Reserve Bank has also released a revised chapter of its Banking Supervision Handbook (BS19)(PDF 252KB) that sets out the draft conditions of registration that would apply in the event that LVR restrictions were introduced.

Deputy Governor Grant Spencer said LVR restrictions are one of four macro-prudential tools the Reserve Bank can use to manage financial system risks that can arise from asset price, credit or liquidity cycles.  Use of the tools by the Reserve Bank was recently agreed in a memorandum of understanding with the Minister of Finance. 

“LVR restrictions on residential mortgage lending can help to dampen excessive house price growth in periods when credit growth is boosting housing demand beyond housing supply,” Mr Spencer said.  “In so doing, they can reduce the risk of a rapid correction in house prices and the economic and financial instability that would ensue.

“In situations where house prices are overvalued, the further that house prices rise, the more likely it is that a disruptive downward correction will occur.  Such a correction would be very damaging if combined with a significant deterioration in economic or financial conditions.”

Mr Spencer said that, as a result of feedback received during the consultation, the Bank was making some changes to the way it would implement LVR restrictions. 

“High LVR restrictions would involve setting a limit on the proportion of new high-LVR lending that banks are able to do, rather than restricting it altogether.  This ‘speed limit’ approach would enable many high-LVR borrowers to continue to obtain mortgages.

“As we originally proposed, banks would be permitted to exempt a limited number of categories of high-LVR loans, when calculating their compliance with a specific speed limit.  These include Housing New Zealand mortgage-insured loans, bridging loans, refinancing loans and high-LVR loans to borrowers who are moving home but not increasing their loan amount.

“Banks commonly issue mortgage borrowers with pre-approvals, which represent a firm commitment to provide housing finance and may be valid for up to six months.  Some banks have indicated that they might be unable to meet a speed limit in the first few months of it being introduced due to the pipeline of pre-approved loans.

“To address this issue, we have decided that banks would initially be required to meet a speed limit on high LVR lending measured as an average rate over a six-month window.  Thereafter, the speed limit for banks with lending in excess of $100 million per month would apply to the average rate over three-month windows, as originally proposed.  However, we would expect the banks to modify their approach to issuing pre-approvals, in order to ensure that they fall within any speed limit on an ongoing basis.

“Banks with mortgage lending below $100 million per month will be required to meet the speed limit on the average high-LVR lending rate over six-month rolling windows, to reflect the greater volatility seen in their high-LVR mortgage lending.

“We have also clarified our intended treatment of branches of overseas banks operating in New Zealand.  LVR restrictions would apply only to the New Zealand balance sheet of the registered bank and not the offshore branches of the international bank.  However, the registered bank branch in New Zealand would be prohibited from assisting other parts of the international bank to write high LVR mortgage loans.”

Mr Spencer said that if LVR restrictions are implemented, bank management and directors will be expected to follow the spirit, not just the letter of the restrictions.

“In particular, they will need to ensure that the policy is not avoided or undermined through innovative lending practices. We will be maintaining a close dialogue with the banks.

“As previously advised, the Reserve Bank would announce any decision to implement LVR restrictions at least two weeks in advance of the restrictions taking effect.”

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39 Comments

Surely not in Auckland, ever? “In situations where house prices are overvalued, the further that house prices rise, the more “In situations where house prices are overvalued, the further that house prices rise, the more likely it is that a disruptive downward correction will occur. Such a correction would be very damaging if combined with a significant deterioration in economic or financial conditions.”

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Clever. Using pre-approvals, good for 6 months, the banks have snookered the RBNZ already.

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Im sure when the 2 weeks notice comes up that there will be a lot of those 6 monthers....but its only a few thousand first time buyers, no biggee IMHO.

regards

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By 'proportion of new lending' do they mean: a) the number of new loans that meet a high LVR threshold?

OR

b) proportion of new lending in $ terms that has a high LVR?

 

This is very important.  If (a) then banks will only lend at over 80% to aucklanders for 800k plus properties, the exact people that are causing the instability

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but that can be tuned if its not having the desired effect surely?

regards.

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I think we will see zero high LVR lending in the provinces (which have not experienced the destabilizing increases), and all the allowed high LVR lending will occur in Auckland, maybe in Wellington and Chch also. 

Looking only at 'proportion of new lending' means it doesn't matter if the bank lends the money at 5% dep or 19% dep, as total amount lended at either ratio will be classed the same, i.e as 'high LVR money'.

So... All high LVR lending will now occur in Auckland/welly/chch, and will be at 5% or less levels, to people who earn 200k plus a year or own multiple income generating properties.  Everywhere else will see big price falls.

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Seriously ? . I expected more from the RBNZ.  This is appaling.

 Did none of them study economics?

Have they never heard of Supply and Demand and its effect on price ?

Dont they realise that their plan is dealing with the symptoms of the Auckland house price  problem and not the causes ?

Ignoring textbook economics ... have they ever heard the expression "Pissing into the wind "? GOOGLE IT

The only true free market in New Zealand that is free from any state interference and transaction  taxation is the trade in property .

The banks are willing to lend , and carry the risk of those loans being serviced or becoming non-performing impaired debt

Currently there is an insufficient  stock of houses for sale in Auckland  to meet that demand .

Interest rates are low enough to warrant buying instead of renting

There is an undersupply of land , and excess demand for houses ( for whatever reason you choose from the long list)  , and the only time the price will settle is when supply is sufficient to fulfill market demand .

Its so simple , we need clear statements from Govt that Auckland will allow the orderly expansion of the city limits,  and this will take the heat out of the market .

In the meantime they should let the market do what is meant to do and let prices reach the level where developers re-enter the market to meet the demand.

 

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Boatman: says "Its so simple"

Couple of straight forward questions for you Boatman

 

What demand?, is it
Pent up demand?, or is it
New demand from the natural growth of the local population?, or is it
New demand from inbound migration
A mixture of the 3?
In what proportions?
Which is the greatest source of demand?

There seems to be a plentiful supply each month according to the REINZ stats and B&T

Now, more importantly
Do you want infrastructure to be provided in the new outer-suburbs?

Roads, Public Transport, Water, Sewerage, Power, Street Lights, Libraries, Recreational space
Yes or No
If so, then
Who do you propose should meet the cost of that new infrastructure?
The new buyers of the new houses in the new subdivisions, or
Should it be spread across all the existing ratepayers in the metro area

 

NB: These questions have been asked before - no answers yet - so dont go quiet on me

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As it is at present, "Who do you propose should meet the cost of that new infrastructure?
The new buyers of the new houses in the new subdivisions"

Now I think there should be options around how that infrastructure is provided on say a 300+ housing development.  So just handing the council any amount they want is plain wrong unless its a true cost, ie that amount should be justifiable in a court of law and competitively arrived at.  Otherwise it should be a turnkey, ie the developer puts in his own services and roads based on a levy on the house certified to a standard by professional engineers with PI insurance and handed over to the council functional when complete. That way there are no nasty debt surprises etc.

regards

 

 

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Just like Edmunds baking powder, rents are sure to rise.
Better still, second tier lenders will have a field day.
With a few mil to spare it's all jam for breakfast lunch and tea.
Bring it on.

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Probably not such a good example , as the iconic Edmonds building was demolished some years ago , to make way for a new petrol station ... ...

 

... 'cos Christchurch needs fewer historic buildings , and lots more petrol outlets .....

 

Tea with scones & jam would be nice , though ... got Assam or Darjeeling ?

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As much as houses are going up?  well lets watch shall we. I think myself we'll be lucky if its 3% per annum across NZ as a whole over say a 3 year period ie little above inflation, or break even more or less.

regards

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I think they could go a lot higher, because I think there is evidence a lot of the growth has been external to the New Zealand housing market.

If you take household debt (as a proxy for the amount debt people have in things like mortgages) and compare it to household houseing stock value (the value of NZ housing stock on a per household basis), for 1992 to 2001 there is a pretty rock steady line of the value of housing stock that house value = 1.5 household debt + baseline (the adjusted R squared of the line is 0.8745 for those that know what that means). From 2002 to 2007 there is a rock steady line of house value = 2.7 * household debt + baseline (the adjusted R squared of the line is 0.9786). My interpretation of this is that for those 7 years money was flooding steadily into the housing sector from elsewhere (as the amount of household debt was not rising in proportion). Now this elsewhere could be from profits from other sectors in the NZ economy being invested in commercial speculation (but I can't see any particular evidence of this as a big change in other internal data), or money coming in from offshore.

After the 2007 GFC the relationship between house value and household debt falls back to house value = 1.3 household debt + baseline (the adjusted R squared of the line is 0.7162 but there was some turbulence in the world econonmy in this period) from 2008 to 2011.

Looking at recent data, I think it is upticking again, with a flow of money coming into the sector beyond that being fueled by residential buyers buying with debt) but this is one of those slightly subjective there is not a lot of data but it looks like a curve up to me.

So, the reason I think it could go up a lot, is that it does seem to be a market open to externalities, and these have played a role in the past, and they seem to be starting to play a role again.

p.s. Does anyone more familiar with the government accounts than I know where you can get a long run time series of NZ household debt, the one I could find easily only went back to 1992?

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+1

 

Bernard can you please try and get this data and do some graphs etc.  Looks like this is a sound approach to looking at where funds for property are coming from.

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Thinking about this approach more....

House value data is likely calculated based on QV/GV data.  So a small number of actual sales has the effect of revaluing all properties.  So there you can see that house hold debt growth can be significantly below growth in value of housing stock.

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But in the case of it being a recalculation from current sales, you would be getting a lag. This is just a divergence. This is the graph: solid blue is the subseries line of best fit for housing value, dotted blue is the full series line of best fit for housing value, solid green is the subseries line of best fit for household debt, dotted green is the full series line of best fit for household debt.

https://www.dropbox.com/s/a18br8u56jbdsh8/debtgreenStockblue.png

I got household debt from the general government figures, and calculated housing value per household by dividing the value of total housing stock by the number of households. These numbers (as far as I could tell) are not inflation adjusted, but doing so would flatten the lines keeping the 92-01 period still in parallel (also the 2008-11). My csv file I made the graph from is here:

https://www.dropbox.com/s/804g2ed24vtqj9o/hsd.csv

and the R code used to generate the graph is here:

https://www.dropbox.com/s/c92bg5g06ahardd/hsd.R

While I have no background in economics or finance, I do have a background in numerical analysis, and that really looks like two things that run in parallel which had something external cause a divergence. This is also basically a lunchtime analysis with data I could easily find, so could be expanded out by someone paid to do this kind of thing.

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Only as long as the Fed doesn't pull the plug. Read more

 

And this market is operating under the same guidance Read more

 

Why wouldn't the slip stream of easy money not land here? - we borrow 40% of our money at dirt cheap rates offshore.

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Have you tried poking around the treasury website. 

http://www.treasury.govt.nz/publications/research-policy/wp/2009/09-03/…

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Thanks for that, I notice they describe the period as asset values outstripping liabilities, without really exploring what that might mean.

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Thanks to the pointer from notaneconomist I was able to dig up a time series going back to 1979, and everything I wrote above still holds.

When looking at house price values against the amount of debt people have (ie. the amount they can borrow) the only anomolous period since 1979 is 2002-2007, when $235265781891.27 (estimated) seems to have been added to the value of New Zealand housing (so through the purchases of NZ houses) that did not come from the borrowings of New Zealand Residents (because no debt for this was created by NZ households).

Since then it has largely just been churn, but looks like it could be back on the same pathway in the last 6 months.

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Non bank lenders will finance the loan at a higher interest rate knowing that that it will be refinanced when LVR meets bank criteria, or provide 2nd mortgage. Give the plebs some credit,    RBNZ are arrogant to think that they can create change. Same as trying to influence the exchange rate. 

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I dont agree.

The problem is the impact on the banks and not on finance companies as they are private and smaller (by themselves not maybe as a sector).  So with the OBR in place when it blows we still get to eat ie eftpos still works.  Once the banks lending arm goes bust and has calls on the loan first, the finance company / 2nd lender is no where, they'll take the big losses, if thats foreign money, all the better.

regards

 

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If you follow your logic big daddy,

Whats "sure to raise" is the OCR as rent is included in the calcuation and hence inflationary where as house prices are not.  Rent movement up - higher inflation - reason for the the RB to raise OCR.

Rents wont go up as renters cant borrow to pay their rent where as a landlord can - there is only so much you can suck from them before resistance is met.

Currently its bubble times, the reserve bank is moving to protect first home buyers  from a future down turn.

 

 

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I agree until your last line. We are in a x2 bubble now I think its a bit late to try and protect what I think is a very thin walled bubble. The RB has to of course even if the Govn says no, well all pollies...its classic can kicking...but even 2007 was too late let alone 2013.

I dont think the RB is particulary wanting to cover first time buyers myself, by themselves toasting a few 10s thousand stupids who paid too much is no biggee.  What its aiming to do or what I would aim for is keeping the banking system operational so we can all eat when we look at 100,000s or more. Hence for me the OBR is there for such a major event aka Ireland...so its really protecting the poorer and us the tax payer IMHO, at least I hope so.

Time will tell.

regards

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THIS IS NOT A BUBBLE

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There is no need to shout, and yes it is....sit back and watch, might take 3 years at most 5. in old age Ive learned that patience often pays dividends...as it were. 

regards

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.. fear not , Mr Boatperson ..... bubbles can get bigger , and indeed , this one looks destined to do so ( as steven says ) for another 3 or 5 years ...

 

.... then .......... KA-BLOOOOOOOOOOOOOOOM !!!

 

Be calm , friend .... it's a 100 % certainty that the councils & the gumnut will continue to stuff things up , and way too few houses will be constructed going forward .... as it has been in the past , forever and ever .... Amen !

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I personally do not think excessive house price in AKL was due to $$ already in NZ economy. In other words, it is because of $$ from outside of NZ econ.

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THIS IS NOT A BUBBLE , its the prices people are willing to pay for a home , and a function of supply and demand.  

Current House prices are reflective of the cost of accomodation in Auckland.   

Auckland Council is largely to blame for this mess , because they have restrcited the supply of land for too longthrough levies, taxes , delays,  and messing people around with the RMA.   

The purchase and sale of houses is the only truly free market in New Zealand , there is full information available to buyers and sellers, there are no restrictions on who can or where they can buy , its free of property transaction taxes.

The open Public Auction sale removes all the INFORMATION ASSYMETRY often  associated with other markets. Its a meeting place of buyers and sellers who are free to bid or walk away .    

I have personally  not seen evidence of speculative activity in Auckland, This is real demand for shelter,  something in short supply for many new migrants and first time buyers. 

I am helping my eldest find a property to buy , and the auctions of middle class houses  I have been to on the shore (of which there are many)  , seem to be young people ( under 35 ) and Chinese or Indian Asians. 

The builder/ renovator brigade is absent from the auctions I have attended   .

Most people seem to be buying a roof over their heads.

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The economic value of a house is its ability to bring in income ie rental yield ie its intrinsic value.

The gross income yield from a house is around 3% on the north shore based of current sales - you know for the decent kiwi digs.

 

I get more from the bank for doing nothing - so why buy property, i buy property for the capital gain.

 Now if you add expected capital gains into the equation. 

 People who buy property expecting capital gains are speculators.

Speculation is one of the three horsemen of a bubble apocalypse. (i forget the other two maybe greed could be another)

Now if there is a shortage of housing – why isn’t rent going up (more than 3%)?

Bubble, bubble toil and trouble.....

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"The builder/ renovator brigade" both need a decent margin between the doer upper and the pristine to make the purchase worthwhile IMHO.  I dont think there are such margins right now....no reasonable discount for the cost and work needed, probably for at least 5years.

I last did a major house upgrade in 2003, I went over budget in that last year, materials only btw.  I sat back and realised in effect with DIY my labour was worse than the minimum wage for the imprevement, basically about free.   Right now Im replacing the kitchen myself, over $6k of bamboo panel alone (not incl fittings, tops and a new cooker). Now a solid wooden kitchen would be well over $10k so Im not too badly off for my labour.  Unless you consider it will take me a month+ so the labour cost is really $4k~6k as well. 

regards

 

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Tis too a bubble...!.....blub blub blub....bubble turned biosphere by the RBNZ and Govt alike.

For the RBNZ a rock and a hard place, for the Govt just dandy opportunism.....have you not yet noticed there are more rainbows under this Administration...that'll be the gloss on the bubble....from all the laundry we do...!

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... not wishing to contradick you , Count , but Herr Helen's mob were more of a " rainbow administration " than little Johnny & the Gnats are ...

 

Nevertheless , until after the 2014 election , the bubble will be held in place by skyhooks or by crooks ...

 

KA---BLOOOOOOOOMIE !!! ..... glug glug , gurgle gurgle .....

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Uh well the left are more openly rainbow....the other side just closeted....

http://www.dailymail.co.uk/news/article-2319948/Nigel-Evans-Gay-Tory-MP…

and maybe even wayout  "kinks" if the reports of dead MPs found hanging in hotel bathrooms dressed in various...uh....items is to believed.

http://en.wikipedia.org/wiki/Stephen_Milligan

Of course the bubble will be held up, its getting harder though....

regards

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Yes GBH...you be right on the rainbow...but that's another t shirt altogether.

 I caught up with Tony Abbott's suppository speech,  I don't think he was mistaken, just misunderstood , ha ha,......although I'm thinking John Boy needs it kicked out of him rather than coaxed.....trust me this guy is a first class bulls*&t artist, and what makes him swo good at it..?

 He just doesn't give a flying frig if and when caught out........!!

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It diminishes the RBNZ to use childish spin lines such as 'speed limits' to describe the exclusion of so many people from the dream of home ownership. What the RBNZ is doing is imposing a minimum speed limit, and banning any driver unable to exceed it from the roads.

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Which is what we have with 90kmh....and that is prefectly reasonable in both cases IMHO. 

Take the US, they had NINJA loans, no income, no job, no assets but mortgage not a problem!  Some ppl will always be unable to buy, they simply do not earn enough, otherwise NZ will also have its NINJA loans and the resultant carnage, expcet of course we have full recourse loans and no jingle mail.

regards

 

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It's humerous to think that so many intelligent beings think this is a so called 'bubble' - Take a look at history people, there may have been a couple of dips, however house prices have averaged +10% per annum over the last 100 years. Talking up a crash aint going to make it happen... good luck with that though if it makes you feel better :o)

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Well, since I've still got post 1990 data open, I'll take a stab at addressing this. If I take the reserve banks value of housing stock and divide it by Stats New Zealand's number of private dwellings (am I the only person who takes this step?) to keep the average per house, then compare the year on year change, I get this graph:

https://www.dropbox.com/s/518cg7dr4wvj1iu/changeVsCPI.png

(year ending Q1 to match the housing data I had)

These are before inflation figures, so I have also included the CPI change for the same period. Now, I would say that since 1990 housing has outpreformed inflation, but it only got to 10% (before inflation) in 8 out of the twenty years, and the all years average change was 6.8% (needing a average inflation adjustment of 2.28%).

The thing is, I would maintain a bunch of money from unknown sources appeared in the housing market from 2002-2007 (see upthread), and it is this period that pushed up prices, and they haven't come down since (excluding this block gives a typical return of 3.7% compared to CPI of 2.2 %). 

It really hinges if 2002-2007 can be considered making the bubble, I think there is sound evidence for it. That said I think the bubble is being affected by things external to the NZ housing supply and demand, so will pop either due to external events or changes to market access. You would seem to be of the opinion that such a long period of large increases is a natural blip, and I'd be interested in exploring your evidence for that.

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