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The Reserve Bank's loosening of LVR limits will give the banks greater flexibility with their lending policies - but David Hargreaves wonders if the banks will actually want that at the moment

The Reserve Bank's loosening of LVR limits will give the banks greater flexibility with their lending policies - but David Hargreaves wonders if the banks will actually want that at the moment

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.

Inexact science

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.  

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Given the capitulation in today's ANZ business surveys perhaps the RBNZ should be cutting rates, or are we playing cat and mouse.

It's just the standard overreaction every time a new Labour government is elected. Business confidence was subpar all through the 2000s as business owners vented their grievances with Labour by marking down the surveys. Yet it made no difference to their actual decisions, and the economy boomed.

I largely agree with this. The LVR loosening will have little impact to the extent the banks will themselves require enhanced LVRs, which they surely will in this market. I think banks will have little appetite for high LVR lending. I would pick 70-80% as the general baseline for owner occupiers. Once you discount recovery value for a mortgage sale process that leaves a float of say 10-15% over current market value. That’s running things pretty tight. When you add this to the capital squeeze the Aussie bank parents are putting on their NZ subs I think overall mortgage credit will decline, and this will feed directly into prices.

will have little or no impact on the market.

confidence has gone.

key was the master at instilling confidence.

the current mob haven't got a clue.

If National had controlled the housing market and immigration over the last 9 years instead of sitting on their backsides, then we would not be in this housing mess.
They allowed the free market to control housing and it didn't work.
All it did was to make the rich richer and the poor poorer.
Key certainly did well !!

Why should any government “control” the market as you put it itsme? A market is a market.

The governments role is to create policy, drive stimulus, and stability. These factors drive business and consumer confidence.

If Key did well good on him.

There is no such thing as a 'pure market'
All markets exist with varying degrees of government intervention.

Therein lies the problem. The markets are sitting back waiting to see how this government is going to intervene
then let the feasting roll.

Of course there is no such thing as a completely free market. Interest rates are controlled, we cannot buy houses in China etc etc etc.

its worse than that - there is now no such thing as capitalism
Central Banks are propping up EVERYTHING to prevent the "market" having to deal with the reality that its insolvent.
But they can't ward off deflation for ever.

The only thing Key did well was make us more insolvent.

Its just as well they gave him a knighthood, otherwise he would have to have been tried for treason.

Got penis envy there fat pat?

Lie back on the couch and tell Dr Kakapo why you went straight to 'penis envy', even though it's a baffling non sequitur with no connection whatsoever with the subject of the conversation. It often helps to talk about it.

Had the RBNZ been allowed to install both LVR's and debt to income ratios, property price gains may more likely have been constrained.

In the context of rising property prices, only implementing LVR's allowed property investors to engage to what is referred to as deposit recycling or equity release. When property prices rose, property investors borrowed against the rise in property price to use as a deposit on their next property purchase. This continued to drive property prices up further as more participants were drawn into the game.

Property prices stopped rising rapidly as APRA imposed revised loan underwriting guidelines in late 2016 / early 2017 (particularly debt serviceability stress testing which effectively linked debt serviceability to income which the big 4 Australian owned subsidiaries implemented in NZ), as well as the higher 40% LVR's imposed by the RBNZ which made it more difficult to engage in deposit recycling / equity release. Had these measures been imposed earlier, property prices may not as risen as dramatically as they have.

key was the master at instilling confidence

Key a confidence man, eh.

I guess that's an apt description.

The LVRs won't make much difference as the banks have changed gears. They already have enough issues with people not being able to pay their mortgages or minimum amounts on credit cards. The tightening of credit is real. Then mix in screw ups like Westpac that were using dubious and volatile credit risk models and RBNZ is making them accumulate capital.

There's a lot of wishful thinking in comments here lately, while ignoring what the banks are doing. Blaming the Government, Spring, Chinese New Year is as useful as consulting tea leaves. Lending is down and it even shows in the household debt graph now.