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Reserve Bank: 'If required, we are prepared to further tighten lending conditions for housing using LVR requirements or additional tools that we are assessing'

Reserve Bank: 'If required, we are prepared to further tighten lending conditions for housing using LVR requirements or additional tools that we are assessing'
Geoff Bascand

The Reserve Bank (RBNZ) says it's prepared to tighten mortgage lending restrictions if it needs to. 

It made the comment in its biannual Financial Stability Report released on Wednesday.

It said the "most straightforward" way of doing so would be to tighten loan-to-value ratio (LVR) restrictions further. 

"However, the marginal benefits (with respect to financial stability and house price sustainability) are likely to decline as LVR restrictions tighten further while efficiency costs would rise," the RBNZ said.

If the RBNZ was to use a new tool, it said debt-to-income ratio restrictions "would be the best option for supporting financial stability and sustainable house prices over the medium term".

Finance Minister Grant Robertson has said he'd only want such restrictions imposed on investors. 

The RBNZ isn't too keen on restricting interest-only lending, as this would "likely have less impact on overall lending conditions than alternatives, while being challenging to implement and enforce". 

The RBNZ is expected to report back to Robertson late this month on debt-to-income ratio restrictions and restricting interest-only lending.

It said implementing such tools would be "complex" and "take time to work through".

Recent borrowers more vulnerable 

RBNZ Deputy Governor Geoff Bascand explained a high proportion of new lending has had high debt-to-income ratios and LVRs.

"This makes recent borrowers more vulnerable to a rise in mortgage rates, and exposes households and the financial system to a decline in house prices,” he said.

"The recent tightening in LVR requirements, particularly for investor lending, will help to mitigate some of these housing risks and support more sustainable house prices.

“We will be watching how market conditions respond to the Government’s recent policy changes."

As of May 1, the RBNZ has required at least 95% of banks' mortgage lending to investors to have deposits of at least 40%. As of March 1, they only needed a 30% deposit. 

And as of March 1, at least 80% of mortgage lending to owner-occupiers has required a deposit of at least 20%.

The RBNZ removed LVR restrictions last year due to COVID-19. 

It warned in its report the likelihood of a "significant" housing market correction has increased.

It said the future path of mortgage interest rates depends on the evolution of inflationary pressure and adjustments of the monetary policy stance at home and abroad relative to neutral rates, as well as credit risk in the housing market.

"Estimates of trend interest rates are higher than current levels, as shown in the Reserve Bank’s February Monetary Policy Statement," the RBNZ said.

"More recently, the Government’s extension to the bright-line property tax and the phased removal of interest expense deductibility will over time reduce the returns on investment property, particularly at high levels of leverage.

"Taken together, the various downside risks to house prices mean that the likelihood of a significant correction has increased."

Banks' core funding ratio rules to return to normal next year

The RBNZ also said it intends to increase banks' minimum core funding ratios (CFRs) back to where they were pre-COVID-19, as of January 1, 2022. 

The change will only be made if there isn't a "significant worsening in economic conditions".

CFRs ensure banks fund a minimum proportion of their lending with stable long-term sources. 

The RBNZ lowered banks' CFRs from 75% to 50% in April 2020.   

The RBNZ, in its report, also reaffirmed banks will need to start holding more capital from July 1, 2022. COVID-19 has seen the start date of these new rules delayed by two years. 

As for insurers, the RBNZ said new capital rules will start being implemented from October 1 this year, with increases in minimum requirements starting in July 2022.

Here is a copy of a press release from the RBNZ:

While New Zealand has so far come through the COVID-19 pandemic better than initially feared, vulnerabilities in the financial system remain, Reserve Bank Governor Adrian Orr says in releasing the May Financial Stability Report.

“Successful public health measures along with substantial monetary and fiscal policy support, helped to prevent many business failures and a larger rise in unemployment. Key New Zealand export prices have also been resilient, with dairy prices at their highest level in several years.

“Yet, despite doing better than feared, border restrictions, supply chain disruptions, and social distancing have reduced activity in affected sectors, and some businesses remain vulnerable.”

We are also seeing the impact of low global interest rates resulting in increased risk taking and higher asset prices. This is an international phenomenon, with the New Zealand impact most visible in higher house prices.

A high proportion of new lending has had high debt-to-income and loan-to-value ratios (LVR). This makes recent borrowers more vulnerable to a rise in mortgage rates, and exposes households and the financial system to a decline in house prices, Deputy Governor Geoff Bascand says. The recent tightening in LVR requirements, particularly for investor lending, will help to mitigate some of these housing risks and support more sustainable house prices.

“We will be watching how market conditions respond to the Government’s recent policy changes. If required, we are prepared to further tighten lending conditions for housing using LVR requirements or additional tools that we are assessing,” Mr Bascand says.

Government support and strong capital and liquidity buffers have meant that the pandemic has had a limited impact on financial system soundness, but further resilience is needed.

Most insurers have maintained or improved their capital positions over the past year. Solid profitability and dividend restrictions have allowed banks to build their capital levels, providing a buffer to absorb any future losses, and overall banks are in a strong position to keep supporting their customers and the economy. New capital rules will start being implemented from 1 October 2021, with increases in minimum requirements starting in July 2022 to support resilience in the future.

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67 Comments

Background note to the media release:
"With the onset of COVID-19 the Reserve Bank was concerned that banks’ core funding ratios (CFRs) – which ensure that banks fund a minimum proportion of their lending with stable long-term sources – could begin to decline, and therefore cause banks to reduce lending to the economy. In response, the Reserve Bank lowered the CFR minimum requirement from 75 percent to 50 percent in April 2020. The Reserve Bank assesses that the normalisation conditions have been satisfied. As a result, the Reserve Bank intends to increase the minimum core funding ratio requirement to its previous level of 75 percent on 1 January 2022, subject to no significant worsening in economic conditions".

1 January 2022. In other word we aint changing anything. We are just trying to talk things into happening.

This sort of change requires forewarning. It is a step in the right direction.
KeithW

I don't know how much notice was given for implementation of the CFR from 75% to 50%. I understand the need to give notice to revert back to the higher figure. But so much notice? Surely a phased approach, somewhere around 3% or so a month until the 25% difference is reduced so the CFR is back to 75%

nigelh
There was no need for warning to be given for the decline from 75% to 50%.
But moving in the other direction does take time.
Any financial institution that needs to raise its core funding (and some may not need to) will start doing that straight away.
KeithW

New Zealand-incorporated registered banks are also subject to a minimum core funding ratio (CFR). The basic notion underlying the CFR is a comparison between an estimate of the funding of the bank that is stable and can be assumed to stay in place for at least one year (‘core funding'), and the core lending business of the bank that needs to be funded on a continuing basis. Core funding is defined as retail deposits plus wholesale funding with maturity of more than one year.

Banks are primarily in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source.

Bank lending to housing rose from $50,788 million (48.36% of total lending) as of Jun 1998 to $305,039 million (60.75% of total lending) as of March 2021.
Business lending fell 5.2% for the year ending March 2021 while agriculture lending fell 1.3% over the same period - source

Hence banks create the majority of deposits which can be designated as retails deposits. (ie not wholesale funding such as foreign borrowing hedged into NZD by CCY basis swaps etc)

Thanks Audaxes that was an excellent post.

"The basic notion underlying the CFR is a comparison between an estimate of the funding of the bank that is stable and can be assumed to stay in place for at least one year..."
Can anyone elaborate on this? Who does the estimating and who decides whether the asset being used is indeed stable? In other words, what prevents the banks from providing a rosy estimation of the underlying value of an asset and it's stability?
Thanks in advance for any response.

keith,

According to the RB's Dashboard, none of our banks have core funding ratios anywhere near the 75% level. All the big 4 are over 90%. I find it difficukt to understand why the ratio was suddenly lowered.

linklater01
I think the RB dropped it in panic last year.
It looks like Rabobank is the only one below 75% currently.
KeithW

"In late March 2020, as New Zealand was moving into its first lockdown, the Reserve Bank was concerned that banks’ CFRs could begin to decline, which in turn could cause them to reduce lending to the economy in order to maintain their CFR above the 75 percent minimum requirement. On 2 April 2020, the Reserve Bank reduced the minimum CFR requirement from 75 percent to 50 percent to support banks’ lending to the economy during the period of economic uncertainty resulting from the COVID-19 pandemic. The Reserve Bank intends to increase the minimum requirement back to 75 percent on 1 January 2022."

https://www.rbnz.govt.nz/regulation-and-supervision/banks/prudential-req....

Sure...if they do it. But a hell of a lot off jawboning going on of late.

"With the onset of COVID-19 the Reserve Bank was concerned that banks’ core funding ratios (CFRs) – which ensure that banks fund a minimum proportion of their lending with stable long-term sources – could begin to decline, and therefore cause banks to reduce lending to the economy.
Nonsense.
by Audaxes | 27th Apr 21, 11:14am
A regulatory impact statement released by the Government alongside its plans for the incoming Deposit Takers Act. last week highlights some of the key points the IMF made. [my emphasis]

Can someone point to a reference on the RBNZ's website where a record of banks' deposit taking actions can be viewed as opposed to deposit creation actions?

Because banks don't take deposits and they never lend money. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source.

Same principle as central bank QE.

Demand deposits referred to by the public as “cash in bank” is recorded and reported by monetary financial institutions (MFI) in units of account by double-entry bookkeeping in a process which the MFIs call “lending ” — but which is effectively a nullity — by debiting loans receivable and crediting demand deposits.

These so created units of account are then denominated at will in dollars, pound sterling, euros, etc., depending on the terms of the documentation or underlying promissory note, or whatever is the legal document giving rise to this type of “lending,” using whatever is the name of the currency in the jurisdiction in which it takes place, but legal tender the “demand deposits” are not.

Banks do not have pre-existing funds in the form of legal tender to lend, except in miniscule amounts relative to the size of their loan portfolios.1 In other words, banks create demand deposits out of nothing, and it therefore remains a nothing. The malpractice continues because public accountants as auditors sanctify the aforementioned practice by “certifying” the banks’ financial statements, provoking credit expansion, moral hazard, asset bubbles, liquidity-stressed financial markets, bank runs, and eventually global financial crises. Link-pdf

by Audaxes | 27th Apr 21, 2:52pm
It's this real, but it is not deposit taking:

But from the point of view of the bank, it has acquired the security without giving up any cash; the counterpart, in its balance-sheet, is an increase in its liabilities. There is expansion, from its point of view, on each side of its balance-sheet. But from the point of view of the rest of the economy, the bank has ‘created’ money. This is not to be denied. Hicks (1989, 58)

We start with the idea of credit creation, specifically a swap of IOUs between a bank and myself involving a bank loan that is my IOU and a bank deposit that is the bank’s IOU. Nothing could be simpler, and yet the mind rebels, especially the well-trained economist’s mind, because this simple operation increases my purchasing power without decreasing anyone else’s. It seems like alchemy, or anyway a violation of some deep conservation law. Real productive resources are the same as they were before, and the swap doesn’t change that, does it?

Spending of the new purchasing power adds another layer of perplexity. If spending increases but real resources do not, then it seems logical that the increased spending must exhaust itself in higher prices—that is the intuitive appeal of the quantity theory of money. My purchasing power may increase, but everyone else’s decreases because their money balances buy less. From this point of view, the alchemy of banking seems like a kind of theft, something to be deplored in the name of economic science and if possible outlawed in the name of the general good. Link

Hardly a robust foundation to bail-in so called "bank depositors' savings" in the event of a bank solvency crisis.

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If they dont introduced DTI limits or kill interest only the RBNZ is failing in its controls and Orr should go.

The RB can only implement DTI if the government provides the DTI to the RB. Orr has been asking for the DTI for a over a year, the government has still not decided...

10
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Publicly ask for it and put the whole mess back in the Fat Controllers lap.

They have been since the OCR and LVR rules were wound down, in the COVID response. It's been sitting in Robertson's lap for over a year.

More than a year: didn't Bill English originally decline it?

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Back in March 2020 when house prices were looking like going into a downslide ( not actual but only perceived risk), the RBNZ swung into action with astounding speed. Less talk more action. Ancient code of warriors.

Now that house prices are through the roof, its footdragging. Warrior's Code but in reverse. More talk less action

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We *might* do something, but we haven't yet. If we do, we'll have to consult about it first for 90 days, and then give the changes another 90 days to come into effect.

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Why not announce today as have no intent (know that you borrowed time till end of May for reasons known to you).

What happened to his reasoning of least regret.

It is no brainer that Interest Only Loan has to go - irrespective. So why the delay ?

Is he still trying to boost as much as possible as if still not enough damage done to FHB or Capital gain to his friends as per him

18
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I call bull. They know, you know, I know that mortgage lending is the only game in town. Without that, it would be up to the government to borrow the shortfall. I know the govt could blow a heap of coin on some park slides but not at the rate they would need to. Maybe delivering pallets of NZD to pensioners to burn over the winter could do it, but the delivery would be a mess and they would only get it in October. So the economy is ironically held up by profligate borrowing by property speculators. That is too bad. And a bit humerous. But mostly bad.

A farce for sure, the Treasury has already but their lead/rose tinted glasses on to suggest that even with constantly sunny days the max the Govt could spend per year on infrastructure is 12B, which at current prices is what, a street in Remuera :) ?

Mathematically impossible to keep pace. Suddenly the RB options become real simple. Do nothing. Then blame macroeconomic forces for eventual upheaval. Run propaganda in the meantime to mask their truly impotent situation.

All I heard was waffle waffle waffle, I don’t know, we have to do more work, I don’t know. Waffle and more waffle. Seriously how much do these guys get paid?

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"Could"

Cambridge Dictionary: "used to express possibility, especially slight or uncertain possibility"

17
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No Time To Talk...Time To Act....

IF YOU WANT TO SHOOT...SHOOT DONT TALK

25
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Yawn all way to slow mate. Lets be honest they are all now waiting for interest rates to start rising so that will do the job for them. Seriously I don't know why we pay some of these people.

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The horse has well and truly bolted, but it's nice to know that Mr Orr is assessing the situation.

20
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I sleep very well at night knowing that there is a lot of assessment going on.

It's why they earn the big bucks.

How to look like you're doing something while actually creating more panic and pile-in

While a few are trying to kill the golden goose, another banner
https://www.barfoot.co.nz/market-reports/2021/april/market-update

Reading between the lines on that puff piece with the world's most punchable face.

The houses that did manage to sell sold at the same price as March.
But 40% less of them sold.

50% more new listings than sales also. I'd be keen to see how that ratio compares to April 2020,19, 18 etc.

Orr is still trying to scare off investors from pouring their money into properties by giving warnings. But sooner he will find out these warning wont do anything until there are policies in place. He needs to know that people who are in frenzy mode buying off properties, they will absolutely not stop until they hit a wall and and see the losses they made in their investments. Enough of these talking games, just put policies in place before it's too late.

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It's already too late.

And moral hazard went out the window a long long time ago.

Hi Jenee,

Your headline RBNZ WARNS......but could it not be a PRE-WARNING to Speculators to go out and buy as much as - giving an opportunity to so called investors to go out on rampage before he acts (wether investors act or not is different but here, we are talking about Mr Orr's intent which almost everyone has missed - that it may be Mr Orr's way to alert his friends and supporters)

And

May be a message to all lobbyist/ media to use this time ( from now till next announcement) to reason and put pressure on government otherwise he will be forced to act and should not be blamed for stopping the party.

Also expecting all agencies to interpret the next data in such a way that gives him excuse not to act.

Jenee, Is this not a possibility.

Investigating going bankless, put these plods to one side!

We need an exit strategy from banks, and it explains why so many are turning to crypto's and why PM prices are so strong. This housing Ponzi bubble will pop, only a matter of time.

Between all the interventions they are starting to make because of refusing to address the underlying problem, all the bits and pieces and bandaids they are applying are making this look more and more like Frankensteins Monster.

It's Alive, It's Alive - But only just.

The Villagers with pitchforks next?

"It (the RBNZ) said the "most straightforward" way of doing so would be to tighten loan-to-value ratio (LVR) restrictions further"

No, the most straightforward way of reducing mortgage lending is to set the OCR back to pre-covid level, i.e. 1.00% ( a rise of 0.75% from where the OCR sits now)

100% agree Yvil, it should have been rising in 0.25% increments over summer to kerb the Housing gold rush. Plenty of time, like isn't there 6 weeks between OCR announcements to be able to look at the result ? thats more than enough time to "wait and watch". The problem is after watching the live RBNZ video today is that they have no idea what "Sustainable house price growth" actually is. They are unable to put a number on it so how in the hell do you control something without numbers ?

LVR, DTI, interest only...as a property investor I don't care as long as RBNZ support the government to keep house price growth in double digits. Revaluing housing is our economy now, without it only export oriented business could thrive.

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"Favours DTIs over restricting interest-only mortgages"

He is 100% wrong. If have to choose between DTI and Interest Only loan, should go after interest only loan as the goal should be to contain speculative demand and IO is used mostly by speculators.

Reserve bank governor should be smart and they are and as his interest is in ponzi to continue is avoiding to target interest only - a tool that contributes significantly to housing ponzi.

RBNZ governor is smart but is not above conflict of interest and making poor decession. Government if can remove tax benefit for being fair to FHB than interest only should be top on her list to remove the biggest advantage that investors have over FHB.

This is the truth. The risks of IO loans in such a low rate environment are massive. Interest only loans reverting to 30 year p&i term roughly doubles the weekly/monthly payments.

Sounds like our own version of subprime

Complex easy, Simple hard.
Assess, discuss, evaluate and pick through detail (complex) is easy to be involved in and necessary. Once you know what to do, it's the simple step to execute a change but also often the hardest, most painful part.

However, if you stay busy on complex easy, the simple hard never comes. Sound familiar???

Assessment - whats it been doing for the last four months. An asset reset is needed. Yes debt junkies will loose it all (the few) but its either that or hyper/stag inflation that nails everyone especially the retired (the many). RBNZ independence is a joke, its inaction makes it look more and more like a puppet for the foreign debt enslavement of society.

The forces determining the value of your currency, together with a country's reliance on export/imports (which is super high in NZ as a country with very little of many things such as metals and minerals, oil and gas etc), which determines the impact of such forces, put up very rigid parameters within which a reserve bank can operate. Countries who ignore such forces end up with madness (Turkey, Argentina). The debt enslavement maybe true, but it is not as if there is an alternative where by something else will not go bonkers. All I mean is that a remedy cannot cause more damage than any improvements it causes, so we should be very careful.

In RBNZ briefing currently on - For any question from media only reposnse is that we are in primilarly stage and accessing and evaluating.

Very uncomfortable with any question on housing and most questions were on housing indicating how unprepared RBNZ is on housing crisis - Have no clue whatsoever - totally lost.

Worst performance ever.

Very disturbing performance and apparently Orr is out of the office sick for a week. A strong sense of total lack of their ability to control anything and they come across as just another think tank. Where are the actual targets ? What is housing price growth sustainability ? 3% PA ? 10% PA ? with houses now over $1M that is going to produce a pretty narrow band based on wages and wage growth. Anything now in double digit growth has to be unsustainable regardless of whats else happens. Flatten the curve has to be the main objective, Kiwi FHB simply cannot have another 6 months of wait and watch.

They have been successful in their tactics as even if they do decide to go for DTI or interest only loan, will not be able to impliment before 2022.

Really, were they not aware and interest only is last on their list, which will be the most effective as DTI though good is mostly restricted by bank themselves when they process the loan application and LVR will not be as effective now - law of diminishing return.

Best bet is Interest Only but why can it not be done on priority just like tax changes, Can do it over a period of time for existing mortagees but can stop new application on buying investment property from 01st June.

Yes lots of blinking going on.

I liked your use of "Flatten the curve" on this, I think that is a rally cry that would be more easily understood than the jargon used by the RB.

Canada’s M2 money supply growth is up 19% from last year. National home prices are up 20%. Go figure.

Anyone looked at the relevant relationship for NZ?

I have. Broad money supply increases & house prices are fairly well correlated over the long term. It is rational. M x V = P x Q. If you assume V & Q are constant, then a change in M ( broad money supply) will cause a corresponding change in P (Prices). It is basic math really.

Right. But you're just saying that there's a tighter line of fit between house prices and money supply.

Seems a complete disconnect between the government and the RBNZ.

If the government plans to freeze wages across the public sector for higher income earners, they must be pretty confident that lower income earners are going to be able to afford increasing house prices.. and then slap on a DTI to discourage them too.

Yep. Doesn't gel at all with their cunning plan of a housing bubble-driven economy. Perhaps all the heavy lifting in income growth is expected to be done by the private sector.

DTI's would halt runaway house prices immediately. Therefore the politicians wont allow the RBNZ to have this tool, or will restrict its usage

Mr Orr got sick with the very thought of facing the camera / media.

Why did he allowed himself to be caught in such a situation.

https://www.newshub.co.nz/home/money/2021/05/house-prices-less-sustainab...

So the media goes with the bank puppet instead. Where's Ashley?

Place restrictions on the use of interest-only and top-up loans so they can no longer be used to purchase additional properties. The restrictions wouldn't affect most home buyers.

Stop talking and telling lies
And start taking some action.

"However, the marginal benefits (with respect to financial stability and house price sustainability) are likely to decline as LVR restrictions tighten further while efficiency costs would rise," the RBNZ said.

The classic catch-22.

Stop meddling with the market and the market will fix itself.

Yep, stop meddling with interest rates - they need to rise & lets get back to a balance between saving and borrowing.

Market will fix itself in no time, and this crazy bubble will pop.

Yep, stop meddling with interest rates - they need to rise & lets get back to a balance between saving and borrowing.

Market will fix itself in no time, and this crazy bubble will pop.

All this market manipulation won't end well. Reducing interest rates was unnecessary in the first place and keeping them in the current levels is totally bonkers. Imposing LVR plus DTI can be just seen as a last resource when the mortgage market has spiraled out of control and the result will be even more inequality, since we will be allowing access to cheap credit to just those with either very high incomes or cashed out buyers leaving the rest once again behind. The RBNZ should acknowledge their mistakes and start raising rates yesterday.