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RBNZ may signal increase to low equity mortgage lending 'speed limit' tomorrow

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RBNZ may signal increase to low equity mortgage lending 'speed limit' tomorrow
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By Gareth Vaughan

The Reserve Bank may signal an increase to its "speed limit" on banks' low equity mortgage lending from 10% to, say, 15% when it issues its bi-annual Financial Stability Report tomorrow, economists from ANZ and ASB say.

Last month Reserve Bank Governor Graeme Wheeler said restrictions on banks high loan-to-value ratio (LVR) residential mortgage lending will be reviewed, along with their implications, in Wednesday’s Financial Stability Report. Deputy Reserve Bank Governor Grant Spencer had previously said the restrictions were more likely to be "phased off" than removed "holus-bolus."

"Net on net we wouldn’t be surprised to see some sort of guidance from the Reserve Bank this week over the relaxation in LVR restrictions. We’re not talking wholesale removal; more likely a gradual relaxation in the threshold (from a 10% cap to say 15% in the first instance). But the life-span and breadth of LVR restrictions is now on borrowed time," ANZ's economists, led by chief economist Cameron Bagrie, say.

"An unwind does look to be around the corner, with appropriate conditionality over the obvious financial stability risks of course still required. That’s a polite way of saying that LVR restrictions will come off, but only if borrowers (and intermediaries/banks) behave themselves."

ASB economists, led by chief economist Nick Tuffley, point out in his speech last month Wheeler said the restrictions “will be removed once housing market pressures have moderated and when we are confident there will not be a resurgence in house price inflation.”

"We think that the Reserve Bank will not have that confidence yet, particularly with the market still very tight going into the busy summer months. However, there is the potential the Reserve Bank will look to lift the restriction on high-LVR lending from the current threshold of 10%," ASB's economists say.

Finance Minister Bill English told Radio NZ the Reserve Bank's hierarchy find themselves in a situation where the interest rate pressure is less than they expected, and house price inflation is a lower than they expected.

"The Reserve Bank's always said they're a temporary measure it's really just a matter of the way they're going to be relaxed and when that's going to happen," English said.

"There's less pressure to have them now than there was, and I would expect that the bank is looking at the path to the end of LVRs."

Since October 1 last year banks have been required to limit their lending at LVRs above 80% (where borrowers don't have a deposit or equity of at least 20%) to no more than 10% of total new mortgage lending. This 10% limit excludes high LVR loans made under Housing New Zealand’s Welcome Home Loans scheme, the refinancing of existing high-LVR loans, bridging finance or the transfer of existing high-LVR loans between properties, and new residential construction loans.

From 25.1% of total new mortgage commitments (before exemptions) in September 2013, high LVR lending (after exemptions) reached its highest monthly point in September at 7.3% since it was 11.5% in October last year. Including exemptions, September high LVR lending came in at 8.4%, or $359 million of total new commitments of almost $4.3 billion.

LVR-OCR combo

Meanwhile, ANZ says the combination of LVR restrictions and four Official Cash Rate hikes has worked so well that the interest rate curve is now very flat.

"If people now migrate in large numbers to low fixed rates (a sub-6% five-year mortgage is now on offer), the Reserve Bank risks losing the policy traction of their primary weapon, namely the OCR, which has its largest impact on floating rates. From a pure tactical perspective, getting the focus back onto the OCR therefore has its attractions," ANZ says.

ANZ's economists also note that given banks have played ball and broadly operated within both the letter and the spirit of the LVR rules, high LVR lending hasn't got near the 10% cap.

"That should give the Reserve Bank some comfort that some relaxation is not going to turn into a lending free-for-all. That said, recent market dynamics bear watching and urge against complacency in regard to housing," ANZ's economists say.

'Hardly sufficient time to making sweeping assessments'

Bagrie and co. note, however, that the LVR restrictions were introduced for good reasons.

"Debt in the household sector remains high despite a period of subdued credit growth, and house prices are clearly overvalued on a range of metrics. That’s a financial stability risk that hasn’t gone away.

"LVR restrictions have only been in for just over a year; that’s hardly sufficient time to making sweeping assessments as to their effectiveness and the disintermediation risks of them remaining in place too long," ANZ's economists say.

Furthermore they're not convinced the risk of house price inflation resurfacing has disappeared, but say introducing the restrictions bought the Reserve Bank time in regards to lifting the OCR.

"The Reserve Bank now has the NZ dollar headed in the right direction; why toy with it? If LVR restrictions mitigated the need for 25-50 basis points of OCR hikes (as Wheeler and Spencer have said), then their removal could see the curve re-price upward by the same. Of course LVR restrictions are very unlikely to come off in one hit, but even a lift in the cap from 10% to 15% could be worth up to 10 basis points. That’s hardly a show stopper currency-wise, but it would reinforce the yield side of the equation," ANZ says.

"On the other hand, while technically an easing in the LVR policy should, all else equal, imply a higher OCR is required, the market may take it to mean that all else is not equal – that the Reserve Bank is now very confident the housing market is under control and the tightening cycle is thus definitively over. Interest rates could actually fall on the news, meaning the Reserve Bank ends up with more easing than they intended."

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9 Comments

The Reserve Bank may signal an increase to its "speed limit" on banks' low equity mortgage lending from 10% to, say, 15% when it issues its bi-annual Financial Stability Report tomorrow, economists from ANZ and ASB say.

 

If so, it should commensurately signal a necessary increase for bank funding depositors' risk return. Simply, hike the OCR!!!!. or propose to remove itself from this non-market, morally hazardous interference in the interest rate discovery mechanism. 

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If the conditions at the time (oct 2013) were such that the LVR restrictions were deemed needed then, then how is it possible that they will no longer be considered needed now?

They exist to insulate owners from getting under water in the event of a drop in house prices.

Cf to Oct 2013; prices are higher, rates are higher, and in my opinion, the risk of price drops higher.

We will not see these watered down anytime soon, keep dreaming ANZ/ASB

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the same reason an illusionist doesn't do the same trick the same way twice  in front of the same audience.

The experiment was reported as successful - the longer it is allowed to run the more proof accumlates that it only served to harm FHB and did none of the things it was supposed to do.  By ending it so quickly stops this becoming obvious....and most importantly protects the sources of those confirming reports

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Truth is , this may be the only effective tool the RBNZ has left in the toolbox to dampen the housing market .

The blunt tool (OCR )  is simply too blunt to work !

Its interest rate policy and mechanism is redundant with money availalbe offshore at anything from zero% interest in Japan to 2% in Hong Kong .

The sheer amount of QE and other hot money  washing about in the Asian economies looking for a place to be invested is enough to buy every single freehold  Title in the whole of NZ before we wake up tomorrow morning 

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The blunt tool (OCR )  is simply too blunt to work !
Its interest rate policy and mechanism is redundant with money availalbe offshore at anything from zero% interest in Japan to 2% in Hong Kong .

 

OCR is not redundant or blunt for domestic New Zealand borrowers and lenders - the foreign rates you quote are only available to highly rated institutions within their own borders.  New Zealand and it's residents borrowing offshore have to pay a credit premium above that which prevails for those not so collectively in debt.

 

Precinct Properties New Zealand (NZX: PCT) announced today that it has borrowed US$75 million (NZ$98 million) for 10 and 12 year terms in the United States Private Placement (USPP) market.

The USPP issuance comprised two tranches, a US$50 million 10 year note with a coupon of 4.13% and a US$25 million 12 year note with a coupon of 4.23%. To remove all currency risk the proceeds have been fully swapped back to New Zealand dollars. The resulting pricing reflects 10 and 12 year funding at 2.17% and 2.19% over the New Zealand three month bank bill rate (3 m BKBM) and will be drawn on 27 January 2015. Read more

 

Current reference rates: UST103 m BKBM

 

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The MIZUHO bank in Japan is offerring a  Mortgage rate  2,675%

We pay around  6% in NZ

Why ?

Is NZ  a higher risk than Japan ?

If anything Japan is more risky than us with almost no growth

Inflation is benign in both countries

We are both net exporters of what we produce in terms of our trade balances

We are both stable Democracies, and both variations of a Constituional Monarchy.

 

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If anything Japan is more risky than us with almost no growth

 

They finance all there demands internally - none of this nonsense of wholesale foreign borrowings such as we endure in grasping beyond our means NZ.

 

At 65 percent of GDP, New Zealand’s net external
liabilities (a combination of net external debt and New
Zealand’s net equity position with the rest of the world)
remain high by international standards. Large net
debt obligations to international investors increase the
economy’s exposure to potentially volatile conditions in
offshore financial markets and investors’ willingness to
hold New Zealand assets.
Read more (page 24)

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NZ has a propensity to over spend hard won export dollars on frivolous depreciating consumer durables such as motor vehicles.

 

The annual rate of new vehicle sales now exceeds 125,000, the highest level since the industry started keeping these records in 1975. Read more

 

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Australian-owned banks, with their combined profits surging more than 10 per cent to $4.1 billion. Read more

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