By David Hargreaves
One of the interesting market reactions to the news that that Reserve Bank is loosening the LVR limits (from January 1) has been the suggestion that the move represents just a minor tweak in the settings.
I would actually not agree there, for reasons I will attempt to explain.
If we look at the changes made for the settings for investors and the loosening of the deposit requirements for them from a 40% requirement to 35% well, yes I think it is right to say that won't make a lot of difference. I don't think the Reserve Bank expects it will make much difference. And, further, I don't think the RBNZ would want to let investors off the leash right now - given that it was only after the central bank went to the blunderbuss last year and hit the investors with the high deposit rule that the housing market really started to come off the boil.
Now, LVRs are not the only reason why the housing market has eased certainly - but clearly the 40% deposit rule for investors HAS had an impact. Not least in terms of an impact is the more clear air it has given first home buyers to get into the market with investors no longer having the clear ability to outbid on properties.
I therefore wouldn't expect to see much of a resurgence in investor interest and involvement post this announcement.
As for the raising of the 'speed limit' for the banks on high LVR lending from 10% to 15% for buyers of owner-occupied properties this potentially could have much more of an impact, potentially much more so than the market reaction to the announcement suggested. But the interesting thing will be how exactly the banks will react to it? And I will come back to this further down this article.
First, it's worth quantifying how much high LVR lending the banks are currently doing. For the purposes of the RBNZ's rules and monitoring the high LVR loans are categorised as where the person taking out the mortgage is borrowing in excess of 80% of the value of the property. So, to turn that around it means they have a deposit of less than 20%.
The RBNZ's latest figures monitoring high LVR lending, for the month of October, show that in this month about $300 million worth of 'high' LVR mortgage lending was advanced.
In terms of where the banks were sitting with the 'speed limit' this amount of lending represented about 9.8% of the banks' total, so, just under the 10%. Remember though, that there are various exemptions applied to the rules - such as for new builds and lending made under Housing New Zealand’s Welcome Home Loans scheme.
Plenty of space
After application of exemptions in October the amount of high LVR lending by the banks represented just 5.9% of the total. So, notwithstanding the cautious nature of the banks and reluctance to inadvertently breach the rules, there's plenty of space there for them to lend more at high LVRs, if they want to. If they want to.
So, to go back to the change from a speed limit of 10% to 15% - it doesn't sound much. But that's the funny thing with percentages. It actually represents a 50% increase in what the banks can lend at high LVRs.
To use some basic arithmetic on the last month's lending figures, if you take the fact that banks lent just under 10% in total on high LVR lending , and this came to $300 million, well then applying a 15% limit gives them room to go up to about $450 million. That's a big jump.
And remember, in the past month the after-exemptions figure in terms of the overall calculations came to only 5.9%. On this basis the banks would be able to comfortably advance $150 million more, or indeed, more than that.
In October the first home buyers group accounted for $722 million of borrowing. So, the potential, for the banks to add $150 million-plus to the amount they make available is likely of considerable interest to this group.
Now of course the problem with these figures is that we are talking about the percentages of lending each month. And the banks don't know from month to month how much they will lend in total - and therefore it's an inexact science working out the amount available for high LVR lending. The amount available may rise and fall quite sharply month-on-month depending on what's happening with home lending among those not in the high LVR category.
But what you would say is that the overall October lending figures were really low. Very low. And to reiterate again - the banks did have plenty of room on the existing 10% speed limit.
The other point to consider is, that 15% of lending on high LVRs doesn't sound so much. But how much would banks WANT to put in this category? How much would the RBNZ want the banks to put in this category?
Before the LVRs were first introduced in 2013 the banks had been getting a bit of the irrational exuberance about them and were aggressively outbidding for market share. They had collectively boosted the amount of existing high LVR lending to 21% of their books. The RBNZ was very uncomfortable with that. Now this amount is down to just 8%.
Is 15% the limit?
With the changes to apply from January 1 we are now talking about banks being able to advance 15% of new lending at high LVRs. It could be that the RBNZ won't want to see them do more than that. Ever.
Then back to the key point. Maybe the banks won't be that keen either.
The banks have in the past year or more faced a variety of funding pressures, including requirements to hold more capital, in some instances to repay capital and the need to make up a shortfall of inbound deposits. It has actually suited them to in a way hide behind the RBNZ restrictions while they undertake credit rationing and tighten up on their lending criteria.
To go back to the earlier point then, how will the banks react?
This I think will be very interesting indeed.
It's worth noting that the banks have not been complaining about being 'restricted' to lending only 10% of their money at high LVRs.
My theory then is that they won't be in a galloping hurry to start now throwing more money around to get their high LVR lending up to 15%. So, while we can ruminate about the possibility of banks lending $150 million-plus a month more maybe to first home buyers that's unlikely to be the reality.
Again though a lot depends.
Some banks may be better placed than others and might see the opportunity to advance market share. It will be worth watching what happens with some of the smaller banks and whether they see this as a specific opportunity.
With banks watching their funding requirements closely and the house market looking likely to be flat in the near future the first inclination of the banks will be caution.
It is going to be very interesting to track the monthly lending figures from the start of next year to see what happens with those high LVR figures. My bet is that at least initially we won't see the overall ratios of high LVR lending lift much beyond 10%.
Then it will be a question of what happens with the housing market and whether the banks do get into a market share war. For now I think they'll be keen to avoid it.
My best guess would be that the RBNZ would likely be able to feel comfortable enough to bring in a further relaxation of the LVR rules when it issues its next Financial Stability Report in May 2018.