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Phase two of RBNZ Act review raises the possibility of loan-to-value ratio restrictions being extended from banks to all lenders active in the residential mortgage market

Phase two of RBNZ Act review raises the possibility of loan-to-value ratio restrictions being extended from banks to all lenders active in the residential mortgage market

By Gareth Vaughan

The government's review of the Reserve Bank of New Zealand (RBNZ) Act is raising the possibility of loan-to-value ratio (LVR) restrictions being extended from banks to all lenders active in the residential mortgage market.

The RBNZ is currently only able to apply LVR restrictions to registered banks. However, a consultation paper issued as part of phase two of the RBNZ Act review suggests the RBNZ could be empowered to apply them to non-bank deposit takers such as building societies, credit unions and deposit taking finance companies as well, and potentially even to mortgage lenders who don't take deposits from the public.

"This could be desirable, because lending restrictions can potentially be undermined if non-deposit taking lenders are willing to offer the loans that the Reserve Bank has restricted. In many other countries, lending restrictions are applied to all lenders by default, rather than simply to deposit takers, but it would be a significant change in New Zealand," the consultation paper says.

"A compromise may be to apply the restrictions to deposit takers only by default, as in recent changes in Australia, but retain the option of extending the [regulatory] perimeter."

The RBNZ put LVR restrictions in place in 2013. They are a measure of how much a bank lends against mortgaged property, compared to the value of that property. The RBNZ introduced LVR restrictions as a financial stability tool following rapid house price growth and increasing use of low-deposit loans by banks. LVR restrictions are one of four tools in an RBNZ macro-prudential toolkit, enabled by a Memorandum of Understanding (MoU) signed by then-RBNZ Governor Graeme Wheeler and then-Finance Minister Bill English in 2013.

RBNZ data shows housing lending by non-bank lending institutions has been growing strongly. It rose 55%, or just over $1 billion, in the two years to May 2019 to $2.836 billion. However even after that growth, non-bank lenders still only account for 1% of the total $265.668 billion in housing loans, with the other 99% held by banks.

Questions for consultation featuring in the consultation paper include;
Is it appropriate to regulate lending standards (eg LVRs)? How broad should these powers be (should they include other tools such as debt-to-income restrictions)?
Should lending standards apply only to deposit takers or to all lenders?
Should there be special governance arrangements for these tools?
Should the Reserve Bank reconsider its view that these tools should only be applied temporarily?
Other than lending standards, when the Reserve Bank makes time-varying use of standard prudential tools such as capital ratios, are there any concerns or reasons for wider political oversight?

'The RBNZ currently has a legal power to apply DTI policies'

In terms of debt-to-income restrictions, or DTIs, the RBNZ continues to want such a tool added to its macro-prudential toolkit. A DTI tool could be used to limit the extent to which banks are able to provide loans to borrowers that are a high multiple of the borrower’s income. The consultation paper notes the RBNZ "currently has a legal power to apply DTI policies," but its MoU with the government doesn't list them as one of the tools appropriate for cyclical improvements to financial stability.

The consultation paper also says the RBNZ's power to apply LVRs is part of a broader power to direct the design of risk management systems. If powers to control lending standards were written in a more specific way, there would be questions about the precise design, it says.

"For example, a power to 'regulate the size of lending relative to customer income and collateral' would allow for LVRs to be applied to other  sectors, eg commercial property, and also allow for DTIs. This would be quite broad, although still more specific than the existing power, a different wording could give a narrower power," the consultation paper says.

Move to an Aussie-style authorised deposit-taking institutions-style model planned

As part of the RBNZ Act review the government has made an "in-principle" decision to merge the two existing prudential regimes for regulating banks and non-bank deposit takers (NBDTs) into a single regime, a bit like Australia's authorised deposit-taking institutions model.

However, the consultation paper appears to favour leaving lenders that don't borrow deposits from the public outside the "inner perimeter" of regulation. Such lenders obtain their funding through the likes of wholesale markets products such as securitisation, or retail issues of longer dated capital markets products such as bonds, debentures or medium term notes. 

Questions for consultation in the consultation paper do include whether the RBNZ should have the discretion to "extend the perimeter" to avoid regulatory arbitrage, such as designating in entities with business models economically similar to deposit takers.

A 2013 RBNZ review of the prudential regulatory regime for NBDTs considered the possibility of changing the definition of an NBDT to ensure it better caught entities likely to raise systemic risks in the NBDT sector, including through lending as well as borrowing. GE Capital, then the country's biggest finance company, would've been the key entity dragged in, had the regulatory net been extended.

However, the RBNZ ultimately decided entities funded via their parent or other members of their corporate group, such as GE, were carrying on the business of lending their own money rather than money borrowed from third parties. Thus the only persons who would directly suffer financial loss as a result of these entities failing were their owners, the RBNZ said.

GE has subsequently been dismembered, with its former consumer finance unit now known as Latitude Financial Services.

The deadline for submissions on the consultation paper is 5pm on Friday, August 16. Phase 1 of the RBNZ Act review focused on monetary policy.

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LVR did not stop raging house price growth which peaked in Auckland in the 3 years after the law change. Because it’s causes were cuts in lending rate, Chinese flows and central bank printing. Also, 20% deposit requirement not really applying to increasing number of fhb going to brokers and also getting multiple loans that banks and rbnz not tracking properly

Housing prices are a multi faceted problem and there’s not one silver bullet. LVR’s would have absolutely had an effect however that effect was damage limitation.

LVR was not intended to stop raging house price growth - the sole purpose of the LVR regime is to protect the financial system by restricting the amounts banks can lend out, and improving the ratios at which they do. The slight effect it had on house price growth was merely a side effect.

I've heard this story of multiple loans taken out against FHB houses, and the available data seems to support it, but I can't see how it would be used to circumvent LVR restrictions? Surely if you can't make a 20% deposit for one large loan, you can't make 2x 20% deposits on 2x loans that are half the size. Splitting loans would only be useful to circumvent a DTI, and only if both banks did absolutely no due diligence. Unless I am missing something?

The 20% deposit was worked around by a number of people. People obtaining loans or even cash advance on their credit card to just bump over that mark. The thing most people don't realise was that at the time it was the 5-10% loans that were restricted as a proportion of the loan book. They've loosened up the rules recently but at the time if you had a 20% deposit the bank wanted you on the books to rebalance.

Now they go into detail to see where the money came from. If someone isn't saving any money but a deposit suddenly appears then it's obvious they have a loan, or a "gift"from family.

The LVRs should be consistent even if it's only to prevent the banks complaining of bias and an incline on the playing field.

Probably as importantly there needs to be consideration of aggregate lending limits. If the intention is to limit buyers to those who have a 10 or 20% deposit then its pointless allowing multiple loans which in total circumvent then control over lending.

The LVR, to me, cannot be working as more and more loans in last year (as a % also) are being made at over 80%. To me, that implies that it is not a RULE applicable to all. The % is increasing most for FHB. As house values on RE NZ (ie asking prices) are reported to be falling more than the median rate reported for sales. this seems a bit worrying to me. Everyone seems to assume that inflation is dead and that therefore interest rates can never rise. As inflation is a function of wages, petrol rises and food prices and the latter two could be very much affected by floods in USA and a potential Iran shock, this assumption is questionable.

I looked at the CPI calculation not too long ago, you can view a breakdown of its composition. Things like food, transport, housing etc. had increased at quite high rates - however other things like internet bills and television sets had decreased, giving a net low increase overall.

The thing that struck me was that the calculation is rigged - the cost of internet is always going to go down, generally the same with consumer electronics. Having these things in the basket skews the CPI lower.

So basically, the things people need to survive have gone up considerably. And the things that people don't need have gone down in price.

And the failures in the CPI measurement push the RBNZ to drop rates, increasing inflation of the things that people need to survive even more.

And another thing, our household grocery bill is $12000 a year... we don't spend anywhere near that on internet, telephone and power.

After the brexit vote UK inflation spiked due to the currency effect. Now any sensible governor of the BoE would / should have raised rates and supported sterling. Instead rates were cut and folks disposable income took a hit.

I have a feeling the same may happen here. The RBNZ knows that if rates are raised the accelerator will be pushed hard down re house price falls in Auckland. They can stomach the slow process we have as a result of the FBB at the moment but more than that I doubt the banks could take the strain on their mortgage books.

One question though ~ how much of the mortgage business in NZ is repackaged and sold as MBS ? Anyone have any ideas ? I'm just wondering where this is debt actually held and whether some of it was off loaded to to local pension schemes ...

Hi Glitzy, you often post about UK, what is it?

A country ? United Kingdom :)

ANZ is about 22% others a bit less. Figs were on Interest a while ago

The Reserve Bank's mandate should be broadened to try to restrict house-price inflation to no greater than general inflation, especially wage inflation, and to do that it needs to use DTIs and LVRs, and extend those beyond banks to all lenders.

Use an ETI, not a DTI


DTI = debt to income ratio

What is ETI?

Expenses to Income
Accounting 101, compare financial position, Loan & Value with each other and cashflow, Expenses to Income with each other. Never mix financial position, Debt with cashflow, Income


What expense to income ratio limit would you suggest?

Also does the numerator include:
1) interest paid on mortgage?
2) principal paid on a mortgage on a P&I loan?

What should a bank do if the ETI limit is breached?
1) does the interest rate increase?
2) is the debt principal payments accelerated?

An example of how the ETI might be breached - a young couple with a mortgage might have a child, so that might mean expenses increase due to the new child, and reduction of income as the mother looks after the child. The ETI would increase and might breach the limit.

Banks have historically applied a debt service to income ratio test - previously the level was 25%, now it is supposedly 33%, however I hear that some households are paying over 40% of their gross household income to P&I mortgage payments.

Remember the main purpose of implementing these macro prudential tools by the RBNZ is for stability of the financial system in NZ.

Yes I think interest and principal should be included in the expenses. The max ratio would be set by the RB just as LVR is. ETI would be applied at time of borrowing (like LVR) to prevent borrowers getting into too much cashflow strife. If ETI is breached during term of loan, no problem as long as borrower pays interest and principal (add is always the case)

My point is DTI is nonsensical. Let's say the RB sets a max DTI of 5.
So Jo Blogs who earns $100k gets a $500k mortgage. He pays 4% interest = $20k pa.
In three years interest rates are at 8% Jo's sister Jane (who earns the same as Jo) can also get a $500k loan despite having to pay $40k interest pa (double) because her DTI is also 5 because the "E"xpense part of the equation is missing from DTI

I think the lvrs were an intergenerational disaster inflicted on the young by the older boomers who wanted the realestate game to themselves. I brought my first home in 2006 on 10% deposit and never looked back. I always made my payments as I would if I was renting and I got boosted by equity gains as the property value increased steadily over time. Theres a whole generation of fhbs who have missed out on even bigger gains since then as boomers and foreign owners have snapped everything up leaving renting as the only option for the rest. When John Key famously declared NZ open for business after Nationals second election win I was full of hope for the 'brighter future' I doubt anyone, including myself realised what it really meant.

Agreed. The LVRs would have been fine had we the capability or know-how or desire to deliver supply in meaningful numbers.

We do not have any of those things and a result, the prices spiked. Thank god for the current lull, even if it is underpinned by the same factors that will likely cripple wage growth.