The Reserve Bank's made a shock announcement that next month it will consult on the possible reintroduction of high loan to value ratio (LVR) lending limits on banks early next year - and concedes it is now observing "rapid growth in higher-risk investor lending".
The move, to reintroduce the LVRs in March, is in effect a screeching u-turn by the central bank and goes back on its commitment to have the LVRs lifted for at least 12 months. It will inevitably lead to questions about whether the RBNZ may now go back on its previously announced - and reiterated - commitment to leave the Official Cash Rate unchanged at 0.25% for 12 months - so, till at least March next year.
The shock value of the LVR announcement is its timing, which is very surprising ahead of two major set piece normal RBNZ announcements, namely the latest Monetary Policy Review to be made later on Wednesday and the Financial Stability Report due in two weeks.
By rushing the announcement out now the RBNZ is signalling through its actions that the housing market is clearly getting away on it.
The RBNZ lifted the LVR restrictions in May of this year, supposedly for at least 12 months.
The LVR restrictions - originally put in place in 2013 - are used to reduce the risks to financial stability from higher-risk lending. At the time they were removed the LVR restrictions called for investors to have 30% deposits for houses, while in terms of lending to owner-occupiers the banks were limited to only 20% of their new lending for loans in excess of 80% of the value of a property.
In the statement from the RBNZ on Wednesday Deputy Governor Geoff Bascand said the decision to remove the LVRs earlier this year had been made "to best ensure credit could flow, and that they did not have an undue impact on the mortgage deferral scheme implemented in response to the Covid-19 pandemic".
“Circumstances in the lending market have since improved and we are now observing rapid growth in higher-risk investor lending. We will consult about re-instating the restrictions we had in place pre-Covid, which limited the amount of high-risk lending that banks could make,” Bascand said
The very surprising thing about both announcements is that they come ahead of the RBNZ's scheduled Monetary Policy Review on Wednesday and just two weeks ahead of the next scheduled Financial Stability Report - which would normally be considered the forum for dealing with issues such as the LVRs and bank capital.
The twin announcements from the RBNZ would suggest great urgency on its part and acknowledgement that the housing market is starting to seriously overheat.
RBNZ Governor Adrian Orr had fired warning shots last month that the central bank was looking at the possibility of reintroducing the LVRs. Since then, however, the housing market has looked to be getting hotter and hotter.
Meanwhile, the RBNZ also says its moratorium on banks paying dividends and redeeming bonds, put in place in April, will continue until at least March 31 next year "to support the stability of the financial system."
Additionally the RBNZ has written to insurers telling them it expects they will only make dividend payments if it's prudent to do so, having regard to their own stress testing and elevated risks in the current environment.
This is the announcement from the RBNZ:
The Reserve Bank – Te Pūtea Matua is further delaying the start of increases in bank capital until 2022 to allow banks continued headroom to respond to the effects of the COVID-19 pandemic and to support the economic recovery.
This delay supports other actions the Reserve Bank has taken to cushion the initial economic blow of COVID-19 by promoting cash flow and confidence in the financial system.
“The Reserve Bank’s actions throughout this period have promoted monetary and financial stability and provided broad support to the Government, financial institutions and New Zealanders,” Reserve Bank Deputy Governor and General Manager Financial Stability Geoff Bascand says.
“COVID-19 has emphasised the importance of buffers in the financial system. The more capital a bank holds, the better it can weather economic storms and meet customer needs during tough times.
“Delaying the implementation of parts of the Capital Review decisions by a further 12 months strikes the right balance between providing more headroom for banks to support lending now by drawing on their capital buffers, while also ensuring that capital levels lift in the longer term to support financial stability.”
The Reserve Bank remains committed to increasing capital requirements in the medium-term to underpin financial stability, Mr Bascand says.
The changes mean the increase in the Prudential Capital Buffer will not begin until July 2022. The Reserve Bank will reconfirm this timing near the end of 2021, and will consider making further amendments to the timing if the conditions warrant it. Other aspects of the capital reforms will proceed from 1 July 2021, including the new rules around capital instruments. More detail on this will be released on November 17.
Reserve Bank will consult on loan-to-value ratio (LVR) restrictions
Meanwhile, in December, the Reserve Bank will consult about re-instating loan-to-value ratio (LVR) restrictions on high-risk lending with effect from 1 March 2021.
LVR restrictions are used to reduce the risks to financial stability from higher-risk lending. The restrictions were removed in May to best ensure credit could flow, and that they did not have an undue impact on the mortgage deferral scheme implemented in response to the COVID-19 pandemic.
“Circumstances in the lending market have since improved and we are now observing rapid growth in higher-risk investor lending. We will consult about re-instating the restrictions we had in place pre-COVID, which limited the amount of high-risk lending that banks could make,” Mr Bascand says.
Bank Dividend restrictions will remain in place
The Reserve Bank is also announcing that the restrictions on dividends and redeeming non-Common Equity Tier 1 (CET1) capital instruments put in place in April 2020 will be retained until 31 March 2021, or later if required. This will continue to support the stability of the financial system.
Reserve Bank updated expectations on insurer dividends
The Reserve Bank has also written to insurers to advise it has updated expectations on dividends. The Reserve Bank expects that insurers will only make dividend payments if it is prudent for that insurer to do so, having regard to their own stress testing and the elevated risks in the current environment.