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The Reserve Bank's loan to value lending restrictions are about to 'celebrate' their fourth birthday. But with the wind changing in the Government and a new RBNZ Governor to appoint, will there be a fifth?

The Reserve Bank's loan to value lending restrictions are about to 'celebrate' their fourth birthday. But with the wind changing in the Government and a new RBNZ Governor to appoint, will there be a fifth?

By David Hargreaves

Yes, you heard that right.

As of this Sunday, October 1, New Zealand will have had loan to value lending restrictions in place for four years. That's quite a long time for something that was supposed to be 'temporary'. So, the question is: Will there be a fifth birthday or will 2018 finally see the removal of LVR measures?

If we recall, the announcement introducing a 10% 'speed limit' on high LVR lending was made by then RBNZ Governor Graeme Wheeler on August 20, 2013, along with the rationale for the new measure.

Since then we've had what in Hollywood blockbuster terms would have been styled LVRs II, in 2015, and LVRs III in 2016.

The first tweak to the policy introduced from October 2015 was the unsuccessful Auckland-targeted measures. These saw LVR rules tightened in Auckland but loosened a little elsewhere. The changes appeared to have the unintended consequence of broadening the housing boom from what was largely an Auckland story to a more nationwide heating of the market.

The second change, made in something of a climate of desperation as the market scorched to new highs in mid-2016, saw the RBNZ pull out the blunderbuss - with 40% deposit limits aimed at housing investors.

As the monthly borrowing figures collated by the RBNZ tell us, borrowing by investors has dropped markedly from the very high levels seen up to the middle of last year. The housing market itself has now gone off the boil.

Clearly the investor LVRs have had an impact but there have been other factors in play. The Aussie banks have been facing capital-related pressures from across the ditch, while here they've been struggling to attract deposit funds - thus pushing up mortgage rates. Lending criteria have been tightened, notably for new building activity. And, based on largely anecdotal evidence - because the official figures are useless - foreign buying has dried up.

Are LVRs still needed then?

Both main political parties asked the question in the run-up to the election, which would tend to point to future political pressure being brought to bear on the central bank to give house buyers a break.

In its comprehensive website section addressing frequently asked questions about LVRs, the Reserve Bank still notes the 'temporary' nature of the measure, thus:

"They are temporary. The Reserve Bank actively monitors developments in the housing market, financial system and the economy, and is committed to taking action when necessary to support the long-term stability of the financial system. LVR restrictions will be lifted once the Reserve Bank judges that the risks that the housing market poses to financial stability have lessened sufficiently." 

So, temporary then. Temporary for four years so far and counting.

I think left to its own devices the RBNZ is unlikely to conclude any time soon that the risks financial stability from the housing market have "lessened sufficiently".

The RBNZ has continued to warn about the possible re-emergence of housing pressures. In a sense it acts like someone not quite believing what they are seeing with the housing market at the moment. Actually, yours truly is with them on this.

Things could turn quickly

The funding pressures on the banks are showing signs of easing. Maybe the mood of foregin investors is about to change. Once Winston's made up his mind perhaps the thoughts of another three glorious years without (an official, by-name) capital gains tax will encourage the buyers out in force again. Indeed, if there's any thoughts that next time might see a Labour government and that might lead to formal adoption of capital gains tax, well, perhaps people have incentives to 'get in now while the going's good'.

What that all means is that the housing market could turn up again quite quickly.

Which is why I say, left to it's own devices the RBNZ's probably not going to remove LVRS.

However, outside influences are likely to be the ultimate determining factor here.

It's clear that the LVRs and the move to adoption of 'macro-prudential tools' were very much Graeme Wheeler's baby. He was strongly influenced by what he saw when working in the US during the GFC.

But now the champion of the macro-pru measures has gone.

As of now Deputy Governor Grant Spencer has his hand on the tiller and he will be steering the ship for the next six months till a new permanent Governor takes over.

In order to give time for a decent handover, it would be expected that we will hear quite soon - possibly as soon as next month, or certainly November - who the new Governor will be.

A new Governor

The selection of a new Governor is interesting.

Essentially the Reserve Bank picks the candidate they want and then recommends the person to the Minister of Finance, who then officially makes the appointment.

So, in theory, the board might recommend somebody that the Government doesn't agree with. In reality, it's to be imagined that the board would recommend someone they know would be acceptable.

And what would 'acceptable' be in the current climate?

We know that Wheeler was a big fan of the macro-prudential tools, and that he was mad keen to get a new one added in the form of debt-to-income ratios, even though he had gone as far as promising not to use them at the moment.

The Government pushed back and at the moment the DTIs initiative is going through some sort of purgatory whereby the RBNZ has been forced to consult on it first before getting approval from the Government. This of course got the issue off the table before the election, though not before Prime Minister Bill English made clear he thought they weren't needed.

So, what happens next will be interesting.

Less macro-pru

I would imagine we'll get a Governor far less enthusiastic about pushing macro-prudential measures. And it could be that they will be more amenable to the idea of removing the LVRs.

I guess one thing that the incoming Government could do is agree after all to putting DTIs in principle into the macro-pru toolkit (but perhaps with sufficient bells and whistles attached that they could not be implemented without some further recourse to Government) in return for a loosening of the LVRs.

If that does happen, and the housing market doesn't show untoward signs of bursting into life, then the LVRs would likely be loosened in the second half of next year.

So, I think it is unlikely the LVRs will make it to their fifth birthday. And I also reckon that under the new Governor we'll be hearing a lot less of the macro-prudential tools.

As for what happens if the housing market does take off again? Well, maybe somebody will come up with a recipe for building 20,000 new homes a year in Auckland. I'm not holding my breath though.

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It should be obvious from the experience over the last 5 years that at the current level of bank capital requirements, macroprudential limits (LVR and/or DTIs) are necessary for the RBNZ to achieve its mandate to maintain a sound financial system.

Perhaps RBNZ could lift its LVR limits, and fulfil its mandate for financial stability, if bank capital risk weightings are increased to do an equivalent job. E.g. by requiring bank capital on a loan at 80% LVR to be 20% of loan value, but a loan at 95% LVR requiring bank capital to be 35% of loan value.

David, - elections are finished ... the party is over ... people's political extortion is also finished .. and the Market will rearrange itself with the current rules in place and whatever future tweaks in immigration numbers ( which will largely affect the rental market , as buyer's money is ready for the next market cycle) ... LVR did what it was supposed to do , apply a brake on out-of-control market fueled by Both need and greed ... It shall be lifted when there is enough supply to compensate for a hopeful future moderated demand & when the damage caused by Bank Lending start hurting the Construction Industry and private developers !!
The most important things are that CGT and Land Taxes have been kicked to touch until 2020, sideline speculators ( Investors) are gone - there is no juice left in an over priced market and the percentage of FHB will gradually increase as a total of properties sold, but it remains just that - a percentage! not affordability ...most crash doomers and gloomers are ( and will be as time goes by) disappointed ...prices will oscillate around what it is now while affordability will get better with time ... it will be up to the coming government to design a correction to rebalance the whole economy of which the Housing market is a major part of .

I say remove the LVRs and blow up our financial system so most kiwis can experience true hardship. It's want the people want.

LTVR , what a waste of time , energy and effort ................... to what end ?

Its has not stabilised the market , reduced speculative activity, slowed price growth or dampened demand and its therefore quite simply Not Fit For Purpose

We still had rampant house price growth driven by factors totally within our ability to avoid ( specifically immigration ) .

The ;LTVR has had no effect other than to protect the Banks from themselves , and at the time we told them so.

The chattering classes seemed think the LTVR would miraculously slow or reduce house prices

All that the LTVR has done is restrict ordinary Kiwis from buying a leaky secondhand hovel with a smaller deposit , and given wealthy migrants or those able to borrow in Asia at 2% a major advantage over locals.

The LTVR has NOT stabilized property asset prices at all , which means its simply not fit for purpose

We should fire that entire august body of public servants and academics who call themselves the RBNZ MONETARY POLICY COMMITTEE and hire some people who have their feet grounded in common sense and reality .

They would be prudent to keep the LVR in place for Auckland at a level of about 40%, because the Auckland market is almost that much overpriced.

If miracles of miracles occur and the Labour Party in Auckland decide to do something helpful (an unlikely scenario I'll admit), the Auckland Council could cut about 30% of costs out of the Auckland market in under 12 months. If the Phil Goff were to stop his widely distributed sprawl, costs would fall and homelessness would become less endemic.

If such a miracle were to occur, a 30-40% drop in property prices could jeopardise bankers equity if LVRs are removed. With the LVRs in place the banks are protected against the unlikely risk of Auckland City Council rising to levels of planning mediocrity.

Until we have an immigration policy that is sustainable, then the housing mess will never be rectified.

Lets hope Winston keeps to his word and forces the next Government to slash immigration to benefit the majority and not just the high income people.

Well, maybe somebody will come up with a recipe for building 20,000 new homes a year in Auckland.

Robots, SIP and Factories. 24/7 production of accurate, weathertight dwellings, under cover.

With unemployed Awkland Plannerz to sweep the floors and feed the dogs. The dogs are there to keep the Plannerz hands off of the Robots. 'We Know Best' does not play well in Factories....

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