The Reserve Bank (RBNZ) is worried “risks associated with the housing market are accumulating”, but it isn’t looking to do more to restrict mortgage lending anytime soon.
The RBNZ, in its biannual Financial Stability Report released on Wednesday, was clear it wants to see the effects of recent policy changes before doing more to rein in mortgage lending.
What’s more, it will need Finance Minister Grant Robertson’s permission to implement debt-to-income (DTI) ratio restrictions - its macro-prudential tool of choice beyond loan-to-value ratio (LVR) restrictions.
The difficulty is, the RBNZ isn’t bowing to Robertson’s view that restrictions should only be applied to investors.
The RBNZ, in its report, recognised: “DTI caps would tend to impact more on investors and higher-income owner occupiers, who borrow at higher DTI ratios on average.”
But it said: “The impacts on access to credit for first-home buyers could be further mitigated with speed limits.”
The RBNZ currently applies speed limits to LVR restrictions. For example, it allows 20% of banks’ mortgage lending to go to borrowers (owner-occupiers) with deposits of less than 20%.
‘Sense of conflict’ between Govt and RBNZ goals
Asked whether such a speed limit would allay his concerns around DTIs hurting first-home buyers, Robertson said: “I’d need to look very closely at that, because my concern remains that if they were applied in a blanket fashion that would have a disproportionate effect on first-home buyers.”
Robertson recognised the argument it might be difficult for the RBNZ to justify exempting first-home buyers from DTIs on financial stability grounds, when this group of borrowers is taking out increasing large loans compared to their incomes.
But he said: “From our perspective - from the Government’s perspective, that has to be balanced against the other objectives that we have. And that includes making sure that we do see more first-home buyers balanced against investors.
“This is a classic moment where the policy objective… and macro-prudential policy come into some sense of conflict. We’ll resolve that.
“But I am prepared to look at the proposal and see how that would work and what the impacts would be.”
The RBNZ will report back to Robertson on DTI caps and the possibility of restricting interest-only mortgages at the end of May.
DTIs wouldn’t be implemented for several months
The RBNZ said that should Robertson decide to give it a DTI tool, it would take several months to implement.
“A data collection process for DTIs is already in place, but further work would be needed to finalise the design of the tool and update bank systems,” the RBNZ said.
“The estimated lead time is six months.”
Making its case for DTIs, the RBNZ explained they serve a different purpose to LVRs. While LVRs limit the amount a bank stands to lose if a borrower defaults, DTIs ensure borrowers can service their debt.
“Evidence suggests that debt serviceability restrictions are an effective tool for moderating house prices cycles,” the RBNZ said.
“Their effectiveness is likely to be sustained over time to a greater extent than LVR restrictions.”
RBNZ open to requiring investors to have a 50% deposit
The RBNZ noted LVRs have already “significantly improved the resilience of the financial system”.
Yet it said the marginal benefits of LVRs would dimmish if they were tightened.
This said, the RBNZ noted it could still tighten restrictions.
“The current LVR settings are tighter for investors [than owner-occupiers], and this differential could be maintained or increased," it said.
RBNZ Deputy Governor Geoff Bascand told interest.co.nz LVRs could be tightened to 50% for investors, for example.
RBNZ less enthused about restricting interest-only mortgages
The RBNZ wasn’t too keen on restricting the use of interest-only mortgages.
“This is likely to be less effective in moderating housing cycles than LVR and DTI restrictions, given that banks already undertake lending assessments on a principal and interest basis,” it said.
“Complex rules may be necessary to limit opportunities for avoidance (for example, by using revolving credit and mortgage top-ups).
“Initial analysis suggests that targeting interest-only lending with LVR requirements or adjustments to risk-weights may be easier to implement and enforce than a ban, but more work is needed.
“The estimated lead time is at least six months.”
Changing capital requirements less effective
Finally, the RBNZ recognised it could make banks hold more capital for mortgages they issue.
But it said capital requirements for mortgage lending in New Zealand are already relatively high by international standards.
What’s more, the impacts of changing capital requirements would flow through more slowly than the other options, and they’re less likely to dampen house price growth.
The RBNZ also noted banks already have to hold more capital for investor mortgages than owner-occupier mortgages.
But it said it could increase these requirements if necessary.
The estimated “lead time” for doing so would be three months.
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