The Reserve Bank (RBNZ) has clarified it wants to put restrictions back on bank lending to both residential property investors and owner-occupiers.
The RBNZ on Wednesday announced it would consult on reinstating loan-to-value ratio (LVR) restrictions in March, rather than keeping them off until at least May, as previously stated.
Speaking to interest.co.nz, RBNZ Deputy Governor and General Manager of Financial Stability, Geoff Bascand, confirmed the RBNZ intended to “reinstate the restrictions we had in place in April before we removed them”.
Specifically, he said this meant no more than 5% of a bank’s investor lending could go to borrowers with deposits of less than 30% (IE most investors need a 30% deposit).
And no more than 20% of owner-occupier lending could go to borrowers with deposits of less than 20% (IE most own-occupiers need a 20% deposit).
‘We’re trying to stop all high-risk lending’
Asked why not only put restrictions on investors to prevent making things harder for first-home buyers, he said: “We’re trying to stop all high-risk lending…
“When we had no restrictions before 2013, we were seeing a lot of lending going at 85%, 90% LVRs. The problem with that is, if the housing market does take a downturn (and we certainly expected that earlier under the pandemic), then people are exposed and they suffer losses and then the banks suffer losses…
“We’re trying to keep those credit standards up for everybody.
“We see a little bit more risk with investors than we do with owner-occupiers, which is why we have tighter rules for them.”
RBNZ data, graphed by Kiwibank economists, shows a spike in high-risk lending to both investors and first-home buyers following the removal of LVR restrictions in May.
The uptick has also coincided with mortgage rates falling on the back of the RBNZ cutting the Official Cash Rate (OCR) to a record low, as well as it effectively pumping up to $100 billion of newly created money through the banking system via its quantitative easing programme, and it planning to lend up to $28 billion to banks at a low rate to help them on-lend at a low rate.
Why can’t the LVR restrictions be put on sooner?
Asked at a press conference on Wednesday why the RBNZ couldn’t implement LVR restrictions sooner than March 1 to prevent buyers rushing into the market before then, Governor Adrian Orr said: "We expect the banks themselves to be the ones who are lending responsibly and managing that capital allocation and avoiding undue risk."
Bascand added: “It’s really as early as it could be done.”
He said a long enough lead time was necessary for banks to know how to handle mortgage applications being processed.
Orr said the RBNZ also had to go through a proper consultation process.
“When we are taking away restrictions, we don’t have to consult. When you’re adding restrictions, you do,” he said.
The RBNZ only left a week-and-a-half between proposing to remove LVR restrictions and making their removal effective on May 1.
Orr said he had “no regrets” about removing these restrictions.
“We made sure during the darkest periods of the Covid uncertainty that there was nothing that we were doing… that would get in the way of banks being able to step up and provide confidence and cashflow," he said.
“We had significant concern that the mortgage deferral scheme for example may run up against our own loan-to-value restrictions.”
Onus on the banks too
Fast-forward a few months, and Orr said almost every bank CEO and a number of bank chair people were asking him to put the restrictions back on.
“You’d have to ask the banks why they couldn’t do it themselves. But I assume it’s because of the competitive nature of banks. No one bank felt they could afford to step out… for fear of losing market share.
“So the traditional call came for us to do it to them instead.”
Orr said the decision was made by the RBNZ, which wasn't influenced by Finance Minister Grant Robertson.
Robertson made a point of telling media he brought forward a meeting with Orr on Monday. He then welcomed the RBNZ’s LVRs announcement, saying, “I would like to see the work happen as soon as possible”.
Pulling out the hose while fuelling the fire
Asked why the RBNZ chose to make its LVR announcement on the same day it released its Monetary Policy Statement, rather than waiting two weeks until the scheduled release of its Financial Stability Report, Bascand said: “The later we left the communication, the harder it would’ve been to meet a 1 March date and we would’ve been potentially surprising people very late in the year.”
He also acknowledged that as the RBNZ announced it would provide banks with $28 billion of cheap funding, it would be asked about the impact of this on the housing market.
He said the RBNZ wanted to provide reassurance its monetary policy and financial stability arms were talking to each other.
Bascand wasn’t convinced by the suggestion sky-rocketing house prices were undermining the RBNZ’s social and political licence to conduct monetary policy.
“The concern we have is only about high-risk lending,” he reiterated.
“We obviously don’t have a mandate and we can’t control the housing market. The housing market is a consequence of all sorts of supply and demand factors.”
Here’s a rundown of the questions asked in the video interview, in case you want to skip to bits not covered in the write-up:
Start: Is making it even cheaper for people to borrow the right policy response to the current crisis?
2:00: How much more confidence does the RBNZ need to give the market through looser monetary policy?
3:35: Is the lack of conditionality on the Funding for Lending Programme an admission by the RBNZ the $28 billion of funding will go straight into housing?
5:39: Why has the RBNZ not included building societies and credit unions in the Funding for Lending Programme?
6:51: Why did the RBNZ make its LVRs announcement on the same day it released its Monetary Policy Statement?
8:38: Is the RBNZ worried the focus on house price inflation is undermining its social and political licence to conduct monetary policy?
11:21: Is the RBNZ concerned property buyers will rush in ahead of the LVR restrictions coming in, in March?
12:42: Did Robertson influence the RBNZ on LVRs?
13:23: Is the RBNZ considering imposing LVRs on investors only?
14:48: Why not exempt owner-occupiers from LVRs?
15:58: Should asset price inflation be added to the RBNZ’s monetary policy mandate?