Kiwibank economists believe the RBNZ will 'give with one hand' though lower mortgage rates and take a little back with the other - through tighter lending standards

The Reserve Bank is likely to bring back limits on high loan to value ratio (LVR) lending next year, Kiwibank economists believe.

The comments come as the housing market continues to show surprising strength following the lockdown and the slowdown in the economy prompted by the Covid crisis.

In their First View weekly publication the economists said the RBNZ is aware of the risks from rapidly rising asset prices, specifically house prices, through ultra-low and falling interest rates.

"We think that the RBNZ will bring back LVR restrictions next year."

The RBNZ last week gave a briefing for media to update progress on developing a Funding for Lending programme, (FLP) through which it will directly lend to banks at cheap interest rates. It has indicated it wants the scheme ready before the end of the year. Economists have been speculating the FLP could be introduced as soon as November 11 when the RBNZ issues its next Monetary Policy Statement.

The LVR limits, first introduced by the RBNZ in 2013, were removed as of May 1 this year for an at-least 12 month period in response to the ructions caused by Covid. Since then the amounts of money borrowed on high LVR loans have increased, particularly to investors.

Asked at  the media briefing last week whether the bank would consider applying LVR restrictions to investors again sooner than this senior RBNZ officials indicated they were not looking to rein in property investors with LVR restrictions, saying falling house prices would create a 'worse situation' than the status quo.

The Kiwibank economists said the RBNZ is taking the view on the economy of "let it run hot, rather than let it fall over". But they believe nevertheless that financial stability concerns surrounding a heated housing market will be addressed again via LVR restrictions, while at the same time interest rates are taken even lower.

"The RBNZ is looking to take a least regrets approach," they said.

"Running the risk of providing too much stimulus is less costly than doing too little. Inflation and employment is forecast to remain well away from target for three years. A least regrets approach supports our view that the Bank will announce a Funding for Lending Programme (FLP) at the November MPS in a months' time.

"A FLP will allow banks to pass through lower interest rates to customers, and even lower interest rates in a negative OCR environment. We expect the RBNZ to be bold and deliver a 75 [basis-point] cut in February to take the [Official] Cash Rate to -0.5%. Retail interest rates will remain positive, but wholesale interest rates will delve into the negatives."

With this action and then moving later to reintroduce the LVRs, this would be the RBNZ giving with the one hand, via lower mortgage rates, and taking a little back with the other through tighter lending standards, the economists said.

Meanwhile, the economists expected September housing market figures from REINZ (released on Tuesday, October 13) to show ongoing strength in sales activity and house price growth.

"The housing market has shown surprising resilience," they said.

"Record low mortgage rates and relaxed LVR restrictions have undoubtedly kept the market buoyant.

"And in a low yield environment, people are turning to property in search of ("higher risk than term deposits, but lower risk than equities") return.

"Our chronic housing shortage also sets a floor under how low prices can drop."

However, the economists still see expect a cooling in activity and price growth as we head into the end of the year.

"The end of the wage subsidy will lead to an inevitable rise in the unemployment rate. And net migration, a key pillar of housing demand, has evaporated in recent months.

"But if the past few months are anything to go by the housing market certainly can confound forecasters."