The Reserve Bank says first home buyers may benefit from being temporarily shut out of the housing market, and estimates restricting banks' low equity residential mortgage lending will result in 1-3 percentage points weaker credit growth during the first year the restrictions are in place.
In its Regulatory Impact Statement accompanying yesterday's announcement of the introduction of "speed limits" on banks' high loan-to-value ratio (LVR) lending, the Reserve Bank estimates 12% of banks’ new lending is to high-LVR first home buyers. It says the use of its speed limit approach, rather than an outright ban on high-LVR lending, will help ensure first home buyers continue to have some access to high-LVR bank lending.
It says exempting first home buyers from the restrictions "would significantly undermine" them given first home buyers are a significant proportion of new high-LVR residential mortgage lending.
The Reserve Bank suggests first home buyers unable to borrow will remain renters.
"This could result in financial costs to these first home buyers if house prices continued to increase while the restriction was in place. They would also lose any welfare gain due to any non-pecuniary benefits that accrue from home ownership," the Reserve Bank says.
"Alternatively, it is possible that first home buyers may gain from being temporarily shut out of the market, for example if house prices fall in the future, or if future mortgage rates placed them under financial stress. Costs to first home buyers would also be offset to some extent by the opportunity the purchasing delay would provide first home buyers to increase savings and reduce the amount ultimately borrowed."
Reserve Bank Governor Graeme Wheeler says from October 1 banks will be subject to restrictions on high LVR housing mortgage loans. Banks will be required to restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the dollar value of their new housing lending flows. Due to exemptions the effective figure is expected to be about 15%. In recent months the Reserve Bank says banks have been doing about 30% of their new residential mortgage lending via high LVR loans.
'1-3 percentage points drop in credit growth'
Meanwhile, the Reserve Bank says a lack of data and previous experience with LVR restrictions in New Zealand makes it difficult to estimate the effect on credit growth and house prices.
"However, the Reserve Bank’s modelling, based on current high-LVR mortgage flows, suggests that the proposed calibration could result in 1-3 percentage points lower credit growth for the first year that the restriction was in place."
"This reduction is likely to come about through a combination of slower housing market turnover, reduced house prices and higher average deposits for house purchases. "
The central bank's sector credit data shows residential mortgage growth of $9.3 billion, or 5.4%, to $183.396 billion in the year to June.
Its modelling also suggests house price inflation could be 1-4 percentage points lower over the first year, the Reserve Bank adds.
"This reduction is expected to arise from reduced competition for houses, a direct lowering of the price that some purchasers are able to pay, and reduced house price expectations as a result of the restriction."
"For the most part, the international literature tends to suggest that the effect of LVR restrictions could be at the upper end of these indicative ranges in New Zealand, applying LVR restrictions to the flow of new mortgage lending would take a period of time to materially change bank balance sheets. Therefore, the impact of LVR restrictions on banks’ resilience in a housing downturn would depend crucially on how long restrictions had been in place prior to the downturn," says the Reserve Bank.
Further, it suggests, based on internal stress testing models, if LVR restrictions were in place for two years before a severe housing market downturn, they would reduce losses on residential mortgage loans by 10-15%.
'Too complex and costly to target geographic regions such as Auckland'
Exemptions from the LVR restrictions include;
1) loans made under Housing New Zealand’s Welcome Home Loans scheme;
2) bridging loans;
3) the refinancing of existing high-LVR residential mortgage lending; and
4) the transfer of an existing high-LVR residential mortgage loan to another residential property.
The Reserve Bank reiterated that, in principle, LVR restrictions could be targeted to particular geographic regions such as Auckland.
"However, the use of targeted restrictions is not contemplated at this point. Geographic targeting would be administratively complex, and would require difficult decisions to be made defining ‘problem’ areas," says the Reserve Bank.
"Furthermore, feedback to the Reserve Bank’s March 2013 macro-prudential consultation was that exemptions of large categories of borrowers, such as first home buyers, or more targeted restrictions, such as lending to ‘Auckland’, would be more complex and costly for banks to implement, and difficult for the Reserve Bank to monitor and enforce."
Wheeler yesterday said Auckland house prices were up 16%, year-on-year, with Christchurch prices up 10% and prices across the rest of New Zealand up 4%.