Reserve Bank (RBNZ) Deputy Governor Geoff Bascand is more worried about banks being overly cautious than he is concerned about them lending up a storm, should mortgage lending restrictions be scrapped.
The RBNZ is spending the next week consulting with banks on its proposal to remove its loan-to-value ratio (LVR) restrictions, first imposed on banks in 2013.
Given banks hadn’t done as much high-risk lending as they were allowed to under the rules pre-COVID-19, Bascand believes over-prudence is the “more likely risk” in the current environment - even without restrictions.
Under the rules, no more than 20% of a bank’s new mortgage lending can go to owner occupiers with deposits of less than 20%. Meanwhile no more than 5% of a bank’s new mortgage lending can go to investors with deposits of less than 30%.
In February 2020, 10% of all new mortgage lending (owner occupier and investor) went to borrowers with deposits of less than 20%. Back in 2013, this portion sat at 25%.
LVR restrictions were designed to be temporarily employed to “lean against excessive credit cycles”, Bascand told interest.co.nz.
“We don’t have an excessive credit cycle right now. We’ve really got the opposite. We’ve got the risk that the economy is seriously in a severe downturn. Credit growth will be slowing.”
Helping banks 'soften the blow to the economy'
Bascand feared keeping the LVRs in place could prevent banks from deferring mortgage repayments, as this could tip them over their high-risk lending limits.
“I don’t think there are many [mortgage holders] in that circumstance, but for a small bank with not too many high LVR loans, they might not need many to breach the requirements,” Bascand said.
He recognised there had been a lot of interest in mortgage repayment deferrals, but couldn’t say how many of these were high LVRs.
The New Zealand Bankers’ Association’s members has provided 42,949 customers with mortgage repayment deferrals. The amount outstanding on these loans is $15.9 billion. Put in context, New Zealand banks wrote mortgages worth a total of $5.6 billion in February.
“We’re just really helping banks to soften the blow to the economy in the short-term by doing this [proposing to ditch LVR restrictions]. We’re not really at risk of rampant credit growth,” Bascand said.
He wasn't concerned scrapping the rules would particularly favour investors at the expense of first-home buyers.
“We think banks will be cautious. We think households in general will be a bit cautious because house prices are more likely to decline than to rise solidly in this environment. That probably deters investors. It’s not such a good time to invest if you think the asset prices are going to decline.”
Bascand believed there wasn't much point loosening LVRs, as the RBNZ has done in the past, saying these they would have to be eased quite a bit to have the intended effect. Accordingly he maintained the simplest solution is to just abandon them and review the situation in a year's time.
'I obviously worry about those tail risks in terms of how bad it could be in two years’ time'
Asked how concerned he was about New Zealand’s high household debt in general, Bascand said: “A number of households have a lot of debt and they are very exposed, particularly if they lose their jobs. You can get house price falls, but if you don’t have to sell your house, you could probably ride that out for a while. But if you lose your job, then paying your mortgage becomes a problem.
“We brought this [LVR] policy in to avoid those risks getting worse and… we think those risks have subsided. We’ve improved the stability of the system of the time. It’s safer than it was.
“But I’m not so optimistic or delusional as to think there aren’t risks there. There are risks there if this becomes a long-term protracted downturn. That’s a scenario that’s not implausible.
“All the time we’re looking ahead and thinking, where will we be in 12 months, 18 months. Right now we’re fine in terms of the banking system, but I obviously worry about those tail risks in terms of how bad it could be in two years’ time.”