The Reserve Bank is again taking aim against a still rampant housing market - and has now been given its much wanted debt-to-income measure by the Government.
Additionally it is going to move to tighten up the existing loan to value ratio (LVR) rules, by limiting further the amount of high LVR lending the banks may do.
From October the central bank is planning to reduce the amount of lending banks can do at LVRs of over 80% to just 10% of their new lending, from 20% now. This is for owner-occupiers.
The 10% limit is in line with what the RBNZ originally implemented when first introducing LVRs in 2013.
This move appears to reflect the fact that while the reimposition from May 1 this year of 40% deposit limits for housing investors has seen investors back off - owner-occupiers have been more than happy to fill the gap and the housing market has kept roaring.
Introduction of a debt-to-income measure will take longer - with the RBNZ to start consulting on it from October.
Finance Minister Grant Robertson was a big sticking point for the RBNZ getting proposals for a DTI measure over the line - because he didn't want them to apply to first home buyers.
A compromise has been reached, with the renewed memorandum of understanding (MoU) between the Minister and RBNZ including the phrase that "the Reserve Bank will need to have regard to avoiding negative impacts, as much as possible, on first home buyers..."
The RBNZ has indicated that it may first begin the process of moving towards DTIs by initially implementing an 'interest rate floor', which apparently could be implemented quite quickly.
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Essentially that would be a formalisation of the process by which banks run mortgage applicants through 'test' interest rate levels at higher levels than prevailing rates to ensure they can handle increased payments. The interest rate floor idea would see the RBNZ setting a standard 'floor' rate for the banks to do those tests with.
The updated MoU between the Minister and RBNZ includes these possibilities for a debt servicing measure:
- Debt-to-income ratio restrictions – cap on mortgage debt (or total debt of a borrower including mortgage debt) as a multiple of income;
- Debt-servicing-to-income ratio restrictions – cap on the percentage of a borrower’s income that can be allocated to servicing debt payments;
- Interest rate floors – floor on test interest rates used by banks in their serviceability assessments.
RBNZ Deputy Governor and head of financial stability Geoff Bascand said on Tuesday the central bank was focussed on ensuring borrowers are resilient to a range of future economic and financial conditions.
"We are particularly concerned about those who have borrowed in the past 12 months at high LVRs and high DTIs.
“If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage.
“We’ve already made adjustments to Loan-to-Value Ratio (LVR) restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending.”
This is the release from the RBNZ:
The Reserve Bank of New Zealand – Te Pūtea Matua – will soon begin consulting on ways to tighten mortgage lending standards, Deputy Governor and General Manager for Financial Stability Geoff Bascand says.
The action follows the signing of an updated Memorandum of Understanding (MoU) on macro-prudential policy with the Minister of Finance.
“The updated MoU adds debt serviceability restrictions to the list of tools available which will enable us to be more targeted in our approach to tackling financial stability risks,” Mr Bascand says.
“We are focussed on ensuring borrowers are resilient to a range of future economic and financial conditions. We are particularly concerned about those who have borrowed in the past 12 months at high LVRs and high DTIs.
“If house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage,” Mr Bascand says.
“We’ve already made adjustments to Loan-to-Value Ratio (LVR) restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending.”
In order to prevent this problem from getting worse, we will be consulting on a proposal to further reduce the amount of high LVR lending to owner-occupiers. We propose to restrict the amount of lending banks can do above an LVR of 80 percent to 10 percent of all new loans, down from 20 percent at present. We will begin consulting on this change later this month with a view to introducing it from 1 October 2021.
“We also intend to consult in October on implementing Debt-to-Income (DTI) restrictions and/or interest rate floors in an effort to provide further comfort that borrowing is sustainable. Introducing DTIs will take longer, whereas the banking industry has informed us that interest rate floors could be implemented more quickly.
“Consultation will be focused on operational feasibility and possible calibration of these tools, including their impacts on investors and first home buyers,” Mr Bascand says.
And this is the release from the Minister of Finance:
Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr have updated the Memorandum of Understanding (MoU) on macro-prudential policy to further protect the financial system and support the Government’s housing objectives.
“This change will ensure that the Reserve Bank has the flexibility to respond to emerging financial stability risks and deploy appropriate tools as required,” Grant Robertson said.
“I have largely agreed to the Treasury and Reserve Bank’s proposed update to the MOU to add debt serviceability tools, but as I indicated in June this extension should not unduly impact first home buyers. As such, we have agreed further wording in the MOU that states:
“In the design and implementation of a debt serviceability restriction, the Reserve Bank will need to have regard to avoiding negative impacts, as much as possible, on first home buyers, to the extent consistent with the Bank’s purposes and functions under Part 5 of the Act.”
“I believe this agreed wording will set clear public expectations while maintaining the operational independence of the Reserve Bank. It is still up to the Reserve Bank how it chooses to introduce any restrictions, having had regard to this condition.”
The Reserve Bank has announced its intent to consult on ways to tighten lending standards, citing concern about unsustainable house prices and the risks to financial stability.
It has proposed reducing the amount of lending banks can do above a high Loan-to-Value Ratio (LVR) of 80 percent, from 20 percent to 10 percent of all new loans. Consultation will start with banks later this month, with a view to introduce this from 1 October, 2021.
The Bank also intends to start consultations in October on implementing Debt to Income (DTI) restrictions and/or interest rate floors.
“It’s sensible for the Reserve Bank to consult on lending rules designed to ensure the stability and soundness of the financial system. Under changes introduced earlier this year, the Reserve Bank also has to have regard for the Government’s housing policy to support more sustainable prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.
“It is important to note that any decision to introduce DTIs would only happen after a full public consultation and Regulatory Impact Assessment, which would take a minimum of three months.
“The Government has already put in place a number of measures to cool the housing market to make house prices more sustainable and tilt the balance in favour of first home buyers, including extending the bright-line test and removal of interest deductibility.
“Theses initiatives will make a real difference. However, there is no silver bullet to housing affordability and monetary and fiscal policy need to work together to achieve a sustainable housing market,” Grant Robertson said.
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