The Reserve Bank says its restrictions on high loan to value lending will be removed for at least 12 months as it signposted a week ago

The Reserve Bank says its restrictions on high loan to value lending will be removed for at least 12 months as it signposted a week ago

The Reserve Bank HAS decided to kick the high loan to value ratio lending restrictions into touch as signalled last week.

The date for removal was given as Friday, May 1.

I didn't and don't agree with the move

LVRs were first introduced in 2013 as a move to provide greater financial stability as banks were increasingly offering high LVR loans at the time.

The decision to remove the LVRs came after just a week was given for submissions. The central bank still received more than 70 submissions in that time, however.

All locally incorporated banks who responded were in favour of removing LVR restrictions, "noting this will allow them to support customers through the impact of Covid-19", the RBNZ said.

Of those submitters that were against the removal of the LVR policy, many were concerned about potential adverse impacts on financial stability, such as the risk of bank failure. They also noted that the economy has weakened and job security has reduced, and the ability of people to service a mortgage will likely decline in the coming months, the RBNZ.

The RBNZ said given the current uncertainty around the economic outlook, it considered it unlikely that banks will weaken lending standards to high risk borrowers. "The more likely risk is that banks are overly cautious with lending to credit-worthy borrowers."

This is the RBNZ statement released on Thursday:

The Reserve Bank has today decided to remove mortgage loan-to-value ratio (LVR) restrictions for 12 months. The decision was made to ensure LVR restrictions didn’t have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to the COVID-19 pandemic.

The Reserve Bank’s decision was made in line with its financial stability mandate. The Bank reached its conclusion after reviewing a Regulatory Impact Assessment and robust feedback received from submitters over the consultation period, Deputy Governor and General Manager of Financial Stability Geoff Bascand says.

“The Reserve Bank received more than 70 submissions from members of the public and industry, expressing a wide range of views. The Reserve Bank also directly approached a number of NGOs - including Māori and Pasifika groups to make them aware of the proposed changes, and to provide them a chance to provide feedback on the proposals.

“Although the consultation period was short by the Reserve Bank’s typical standards, this was necessary to respond swiftly to an unprecedented set of economic events. The feedback raised a number of valid points and concerns which were all carefully considered.”

Views on the proposals were mixed, reflecting both the costs and benefits of borrowing restrictions.

Some submitters recognised that removing the restrictions might allow more first home buyers to purchase a home.

All locally incorporated banks who responded were in favour of removing LVR restrictions, noting this will allow them to support customers through the impact of COVID-19.

Of those submitters that were against the removal of the LVR policy, many were concerned about potential adverse impacts on financial stability, such as the risk of bank failure. They also noted that the economy has weakened and job security has reduced, and the ability of people to service a mortgage will likely decline in the coming months.

“Given the current uncertainty around the economic outlook, the Reserve Bank considers that it is unlikely that banks will weaken lending standards to high risk borrowers. The more likely risk is that banks are overly cautious with lending to credit-worthy borrowers,” Mr Bascand says.

The Regulatory Impact Assessment concludes that removing LVRs now does not weaken the resilience of the system. Rather, removing LVR restrictions now supports financial stability by removing one potential obstacle to the flow of credit in the economy, helping to soften the downturn.

Mr Bascand says the action will also avoid any uncertainty around the implications of LVR limits from the mortgage deferral scheme. “It is important banks continue to provide support to credit-worthy borrowers during these extraordinary times.”

The decision is effective as of 1 May. The change will be made via a change in bank Conditions of Registration.

“The Reserve Bank will monitor lending activity and feedback from retail banks over the next 12 months as the economic impact of the COVID-19 pandemic becomes clearer. While we’ve eased the restrictions completely for the next twelve months, we will review the most appropriate setting for LVRs in a year’s time,” Mr Bascand says.

Background

LVR restrictions were imposed as a counter-cyclical macro-prudential financial stability tool in October 2013. LVR restrictions have been effective in supporting financial system stability during the upswing in the credit and housing cycles since the introduction of the restrictions in 2013. By significantly improving the equity positions of mortgage borrowers, it is likely that a significantly smaller number of borrowers will have to sell their house or default on their mortgage as a result of the current economic shock. The current economic conditions resulting from the COVID-19 crisis have led to the Reserve Bank removing LVR restrictions, given the counter-cyclical nature of the LVR policy.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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84 Comments

18
up

All hands to the pumps...

To the pu....

T

.

Reserve Bank warns "its not our job to protect you from the housing market" https://www.stuff.co.nz/business/99408539/reserve-bank-warns-its-not-our...

Best advice is to protect yourself. Don't buy one until this mess plays out.

It should not be. But we saw the RBNZ drop interest rates seemingly primarily to prop up house prices.

So my concern is the number of people in power across government and central banking who have a lot of wealth in property portfolios...

@Pragmatist , the whole thing is academic, as a retired Corporate Banker , I can assure you that no Bank is going to give anyone a 100% mortgage when you have no idea what that asset is going to be worth in a year from now , and more so when the risks are on the downside .

Bankers are not not your friends , but they are also not idiots .

Removing the LTVR rules is purely academic , and assists the banks in dealing with shaky loans or already troubled loans that are over the old % LTVR

My prediction :- THERE WILL BE ZERO 100% MORTGAGES GRANTED BY ANY MAINSTREAM BANK in the next few months at least

I agree 100% with this analysis.

Yeah, there's going to be some very conservative credit policies for the next couple of years at least.

I agree, this action alone won't make the banks hand out wads of cash like they were monopoly money. But the intent is clearly to get/allow the banks to loosen up the purse strings to try to keep the ball in the air.

So the question becomes.. What is the RBNZs next move??? Or are we waiting for a slight nod to Jacinda/Robertson to let them know the field is prepped for the set play they discussed.

Great news. Good time to remove what was essentially a market distortion. Who knows what, if any, impact it will have on bank lending though.

11
up

As long as the government doesnt have to bail out the banks.

Who, other than speculators, would want to buy property with less than 20% deposit anyway.

Well, in December of last year, it was over 36% of First home buyers.. nearly 1000 mortgages to FHBs (so 1700(?) people since most of them would be couples)

That means 64% were not FHBs. Now how many of those were investors/speculators?

No, it means 63% of FHB had 20% deposit or more. (Including those whose got a hand up from parents in one form or another)

@murray , many of the 64% could have been people buying a new house having sold the old one , just not first timers .

Its unlikely that 64% of sales were to spec buyers

I know a lot of people who have sold up and moved to smaller or bigger homes depending on their point in the life -cycle

No, the 36% was a subset of the set of first home buyers. Not up traders, down traders or investors. At least not if they were correctly classified in the data given to the RBNZ anyway.

If I was a first home buyer I absolutely would buy a house with less than 20% deposit. I'd worry about the size of the loan and my ability to pay it back if interest rates went up. The deposit is more to protect the bank, not the buyer.

I would.
FHB with my wife. Both have secure/stable jobs (GOVT).
But only at 11% deposit.
We will wait 6-12 months though to see what happens with the housing market.

wise to wait

Mmmm. Don’t wait too long. There could be a rapid recovery.

I would.
FHB with my wife. Both have secure/stable jobs (GOVT).
But only at 11% deposit.
We will wait 6-12 months though to see what happens with the housing market.

If only we had the same attitudes to the other distortions such as dropping interest rates to prop up prices (prior to the current crisis) and subsidising yields with welfare.

I share those concerns, but they are doing it to keep the economy going, not to inflate housing prices for the sake of inflating housing prices. The more I think about it the more appealing crypto is, but while we're still in world of government fiat that's the way it is and we may as well make the most of it.

Inflating house prices for the sake of inflating house prices is exactly what they do.

They want to inflate the CPI by 1% - 3% annually to keep the economy ticking over in a stable way.

In fairness, the RBNZ did highlight the need for DTI rules at multiple points in order to be allowed to stimulate the economy instead of pushing all money into housing, but the governments of the time (e.g. Bill English) refused. One wonders whether the 3.4 houses per National MP was a factor clouding judgment.

The actions of leaders in this country to inflate the housing market have been damaging to the country and multiple generations. They should be ashamed of their greed.

You could also argue that credit is a market distortion, no credit and house prices would be worth a fragment of what they are nowadays.

Credit is a market. An in undistorted market if the interest rate reflects the risk, with the lender and borrower totally free to decide the terms.

In recent years the biggest stumbling block for potential FHB has been sufficient deposit to meet the LVR threshold.
Those potential FHB without secure employment or are not prepared to purchase a home in uncertain times are not affected.
Those potential FHB who have secure employment, have sufficient funds to satisfy their bank, and feel confident in the extent of the likely fall in the housing market now have great opportunity to purchase a home.
It is a personal choice; many will decide on the first option and many the second. Whatever their choice, there will be many who disagree with them.

11
up

good luck to them if they can get a bank to lend in times like this, i dont expect to see any increase in FHB borrowing figures but i do expect to see an increase in investor lending

And of those potential & actual FHBs that were precluded from leveraging even more in recent years due to LVRs.
What a terrible 'stumbling block' for them.
How lamentable right.

I mean, if only those FHBs had been able to borrow more and have less of an equity buffer going into this.

What a great take.

Those who were prevented from buying in 2013 due to the new LVRs are in a worse position now. Most likely they had to wait another 2-5 years before being in a position to buy.

Actually not really true since the RBNZ lifted them progressively. Read the stats. None of the banks were CLOSE to using limit. What with all the exemptions (constructions) and the real issue at play is always servicing. Servicing is not based on todays rates, because it's a 25-30yr loan... so factors much higher rates in, and at 7,8,9,10x income to loan, just not happening. This is a political play of expediency by RBNZ and may well trick more FHBers into thinking they can borrow now (and be sad if declined), when they always had access to loans if they could service.

14
up

Arsonist Adrian is trying to light another fire!

19
up

The most irresponsible thing the RBNZ could do right now and that is exactly what they do. What the $$$$ are they thinking about?

slaughtering a few lambs obviously! just to keep the property market afloat.

I dont have any sympathy for those who take the bait though...

The effect on the ground may not be much for the next 6 months, though it may seem that Christmas has come early.

Christmas might be when the chickens come home to roost. Mortgage freeze ends in September, by Christmas it will be pretty clear how badly the economy has been hit and there will be a lot of people looking to sell.

15
up

This goes to show how much trouble the banks are actually in, now when the property value drops below the amount that a bank has loaned against it (which it will) banks won't have to do anything. This move is to save the banks for a bit longer but clearly they are in more trouble than we realise.

LVRs wouldn't have forced the banks to do anything before, they only apply at loan origination, or a credit event. If you keep meeting your payments the bank doesn't have to do anything if you are in negative equity.. This is about keeping new lending going..

Wrong Pragmatist. I have had clients with single or multiple properties, their fixed finance period ends and banks do a revaluation before committing again. If Revaluation shows a reduction in value then the client has to put cash in to bring the LVR back into line or start selling down.

Sure, but the banks don't have to do that, that is their own internal credit risk procedures, not the RBNZ LVR limits at work. So this LVR change has no effect on what the banks have to do.

https://www.rbnz.govt.nz/regulation-and-supervision/banks/macro-prudenti...
LVR restrictions apply to new high-LVR loans, and not retrospectively to existing loans. Existing borrowers are only affected if they want to take out a ‘top up’ loan. Banks will still apply their own lending criteria to individual borrowers and may choose to not provide finance in certain circumstances or to provide it only at lower LVRs.

What happened to risk weighted assets and Basel III? Are the banks going to do a mark to market assessment of their collateral in 6 months or 1 years time? How will easing LVR restrictions help if borrowers don't want to borrow and banks don't want to lend?

I'm pretty cynical. In my opinion LVRs were introduced in 2013 to kneecap locals and stop them competing with Chinese money. I don't see any downside risk for banks at this stage. They can make stupid loans and either make out like bandits or get a government bailout.

yep, that still applies (for now?), but this was about the LVR rules that the RBNZ have just run a red pen through. And the RBNZ has already backed donw on the timeline for increase in bank capital requirements even before this CV-19 thing hit.. I can't see them doing much about increasing it now.

How can risk weighted assets still apply? Writing low LVR loans with high risk weights will require more bank capital. That's not even taking into account the fact that falling asset values will raise the risk weights on existing loans if they're marked to market. This is a big fat offloading of risk onto the government balance sheet.

But that applies to the whole mortgage portfolio.. a few new really high LVR mortages is nothing against the pool of older mostly paid down mortgages.. wont move the risk weighting of the whole portfolio much.

But yes, it certainly does head towards the likelihood of the govt having to pick up the pieces later.

That's just not how the LVRs work. Your first comment in the thread in particular is way off the mark.

Simply not how banks work. Were your clients going through second tier lenders, bridging loans, interest only or perhaps looking to expand their house of cards?

12
up

Without other measures to control the housing market, this is just stupid.

Banks will not be that flexible given most of their own economists are predicting 10% to 15% house price decline over next 12 months - so effectively it will still feel like the LVR's are in place and then there is the stress testing they do at around 6% interest rate. So unlikely to see any impact on house sales

The thing is that that is only rolling prices back a couple of years, which is hardly a big drop in terms of time. Whereas the share price drop of some banks is 50% or more.

What was the stakeholder consultation exactly as it sure as hell didnt include the tax payers. An utter shambles.

Gives more scope to banks to lend. But they will apply some caution.

Banks are still using LVR. Some banks as high as 40% for new customers and 20% for existing customers.

So I've just released equity from my rental to use as a deposit to buy a new PPOR. 30% equity remains in the rental and the deposit is 15%, and finance is approved. Does this now mean that I can release more equity from the rental to bump up my deposit?

you can wait a few days and ask the bank.. don't be surprised if they say no.

[ Childish comment removed. Do't do it. Ed ]

LVR - does it matter in current environment.

Throw everything but what has to happen will happen.

Standing at edge of the cliff and from here - will it roll down or just fall off the cliff - has to be seen.

Removal of LVR's does not necessarily mean banks will open the floodgates to reckless lending.Far from it, under current scenario ,banks are more likely to scrutinize applications with an even finer comb to assess the borrower's capacity to service the mortgage. Don't believe ??Try applying for a loan .More likely than not banks are bound to ask for supporting evidence of job stability etc

Yip, the reckless lending has been done the last 10 years.

I’m more interested to see if the banks relax the 7%+ testing rate for servicing new loans. I’ve been on the threshold for 2 years now and actually have to pay this high rate but with a finance company. Sucking more money out of my family than we should be paying (2.95% now hsbc). It all came about because we bought a new build 3 years earlier and lending changed during that time of the build. Only option instead of loosing the deposit was to use finance through a non bank lender. Charged us 18k to do it too. Scandalous you could say. Who is monitoring this type behaviour? Are we bad? no we are still paying finance co rates and havnt missed a payment. Rotten situation now.

That’s rough. What about Co-op Bank fresh start mortgage at 5.25% fixed 1 year?

If you cant pass a servicing test at 7%, then not so sure it is prudent to borrow (that much). The 18k, if it is a fee, is likely scandalous... they obviously must be sidestepping the CCCFA as that can't be cost justified.

Been passing the test in real terms 2yrs now as still own the property but on paper it’s on the edge. Would you pass in a 100k deposit when there is equity to be realised?. That’s why I think they made us pay a huge fee. Extortion I think you call it.

Is there anyone you know who can take over the loan as a private investor at a lower rate? The reason I ask is our neighbour, a builder, in similar situation stranded with his loan, paying it himself after after the relationship ended. Then his old man, retired, stepped in and says well I can loan you the $350k or whatever at a lower rate than the bank but higher than he can get on a term deposit, so now they're both happy.

Just gotta have it all legally written up of course with security registered on the title.

Just a suggestion. I hope you find a solution.

We ended up with a Non-Bank Lender for a mortgage 3 x My salary because my wife was unemployed (early childhood teacher on long term maternity leave), banks were citing the Responsible Lending Code. 5.75% fixed term rates when the main banks were offering 4.5%. Had 25% equity too.

On a day when our esteemed ex-PM Sir John Key was on TV in flash-back telling other Kiwis that what the RBNZ is doing today is behaving in a 'crazy' manner.
(From about 9 minutes in)
https://www.tvnz.co.nz/shows/seven-sharp/live

So when the mortgage freeze ends in September there will be a good seven months in which to scan the market for cheap buys.

I may be wrong, but I get the impression that you can take a mortgage holiday for up to 6 months, as opposed to the scheme lasting 6 months from the day it was announced. With the wage subsidy taking us through to early June, quite a few people won't need to start the holiday until after that. So plenty could still be on it through to early December. A lot can change in 8 months, particularly sentiment. May be early 2021 for good property deals, but how many will be forced to sell is quite difficult to judge.

You do a podcast?

Either way, I expect there will be a lot of people who have lost their business/job/want to cash in on their capital gains towards the end of the year. Yeah, trying to. Been a bit busy in the evenings the past few weeks.

Orr isn’t stupid, he knows that there isn’t any point in tinkering, go hard or go home. The much criticised 0.5% drop to interest rates a while ago actually had the intended result and created inflation, much more than two tentative 0.25% drops would have. He could have tinkered with the LVRs but I think the sledgehammer is the way to go.

Disagree - poorly measured CPI inflation was there already.

As for aggressively induced asset based inflation - it simply only increased the damage.

Finally - I don't think use of a "sledge hammer" is any reflection of particularly intelligent or well orchestrated economic management.

Indeed. It makes no sense to be pretending there is no inflation when house prices are soaring year on year. Just highlights how poorly constructed the CPI measure of inflation is when it does not effectively measure critically important effects of real life inflation on people's lives. By ignoring such inflation it only serves to enrich asset holders and discourage productivity.

It's like giving you a dagger in a gun fight, better than nothing though, I suppose

If property values fall by 10% or even 20% as many commenters suggest, there will be a tidal wave of upside down LVR’s in the very near future.
This could be the makings of new wave of sub prime mortgages that set off the GFC In the late 1990’s which nearly collapsed the whole world economy.

What caused the sub-prime cascade failure was the packaging. Investors thought they were buying reasonable risk profile investments which led to more, right? Not just lots of risky loans, but risky loans packaged as safe loans

On the other hand, more affordable housing would be better for more New Zealanders over many more years. The fault was in inflating house prices unreasonably.

Ha ha.. beat the Covid19 by F.I.RE up the economy glad the team followed the advise, cancelled all minimal prudent measures to regulate the OZ Banks.. but ha ha, talking about knee jerk? too big to fail? - to finally succumbs to the OZ & NZ Banks loan reality. To be recovered in temporary by future phantom bail out numbers by tax payers... then waiting, until the blue team supported by Seymour to open the border quickly with troublesome overlords.

Is it just me or does it feel like the panic button is getting hammered at the moment...

The crooked RBNZ is running out of tricks to keep its property ponzi afloat.

When it collapses I hope the culprits are left with nothing but ashes.

They should have kept them on for investors. with 30% LVR on investors many could still have sold 1 property, and bought 2 more with the capital gains on the first one. It's good to have FHBs getting a roof over their heads, but not "investors".

Its crazy to lend 100% of a new mortgage when there is a very real risk of the asset value dropping by 20%.

I am willing to predict that the banks will NOT be giving anyone a 100% mortgage ................NOT A SINGLE ONE .

So the whole thing is purely academic

Won't be any 100% mortgages, but I don't think the whole thing is purely academic. Bank lending is likely to stay tight, but for some people it will make a difference. Banks wont be lending with 0% deposit of course, what about some cases of 19% deposit, or 15% where borrower income is very good. Some people may also be pushed over the limit by the mortgage deferral scheme, which would've otherwise stopped lenders from utilising the scheme. And now that they are off they are likely to stay off - which will have an impact in the long run when banks eventually feel more bullish.

Awesome!

.

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