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Loan-to-value ratio controls: Must be used with other Reserve Bank tools, might only be effective over a matter of months

Loan-to-value ratio controls: Must be used with other Reserve Bank tools, might only be effective over a matter of months

By Alex Tarrant

New Reserve Bank tools for dealing with asset price bubbles will need to be used together to be effective, New Zealand Institute of Economic Research principal economist Shamubeel Eaqub says.

Meanwhile moves to restrict lending above certain loan-to-value ratios in trying to cool a booming housing market may only be effective for a matter of months, Massey University banking lecturer Claire Matthews says.

Reserve Bank Deputy Governor Grant Spencer, a leading contender to take over from Governor Alan Bollard in September, said in a speech last week the Reserve Bank's existing prudential regulatory framework failed to take account of the growing systemic risk arising from a boom in credit and asset prices between 2002 and 2007.

That aggravated the severity of the global financial crisis' effect on the New Zealand economy.

"The lesson was clear: prudential policy should take more account of macro-financial risks as well as the micro-financial risks specific to individual banks," Spencer said.

"In broad terms macro-prudential policies are aimed at reducing financial system risk by introducing additional safeguards, such as capital and liquidity buffers or collateral requirements that vary with the macro-credit cycle," he said.

"Such policies will also tend to have the effect of either: 1) dampening the credit cycle; or 2) dampening international capital flows and hence exchange rate pressures. For those reasons, macro-prudential policies might be expected to play a useful secondary role in helping to stabilise the macro-economy."

Instruments the Reserve Bank considered "viable candidates" included: the Counter Cyclical capital Buffer, which is described as an additional capital requirement that local bank supervisors may apply when credit is booming, and remove when the cycle is turning down. That's part of the Reserve Bank's Basel III plans (see more on this option here).

Spencer also highlighted the Core Funding Ratio, adjustments to sectoral risk weights used to calculate Risk Weighted Assets under the Basel capital adequacy regime and limits on LVRs.


NZIER principal economist Shamubeel Eaqub said that because interest rates were such a blunt tool for dealing with asset price bubbles, it would be helpful for the Reserve Bank to have other tools in its kit.

“On their own, each of the tools, for example being able to adjust the core funding ratios, they don’t seem like they would do a lot. But if you moved a whole bunch of levers in the same direction, the sum of the parts might be bigger than individually," Eaqub said.

That would mean the Official Cash Rate could remain lower while those tools worked to cool mortgage lending.

“What happens then is you’re starting to impact the behaviour of banks, and the way they’re pushing credit out into the economy, which might be helpful.”

There were some practicalities of implementing tools like tightening capital ratios. A lot of banks already held well above the minimum regulatory amount anyway. It was also possible to get around requirements like tighter LVR ratios.

“For example, now you’ve got parents stumping up with mortgage guarantees or deposits to give to their children to buy houses. So how would you circumvent that? There are some practical issues with that, but I think the macro-prudential stuff is more around insuring stability of the banking system, not necessarily just stabilising the economy," Eaqub said.

"I think that’s really where it comes into its strength. Personally I don’t have a big problem with it. I think these are things the Reserve Bank does anyway. It’s really a question of, do you think it’s going to make a big difference, and no one really knows the answer to that. It’s hard to tell.”

It was also hard to interpret the data put out by the banks on lending at given loan-to-value ratios. You knew how much at been lent at certain levels, for example at LVRs above 80%, but it was hard to see what kind of lending that was.

'Deal with the property love affair'

On property price bubbles, Claire Matthews, a senior lecturer at Massey University's Centre for Banking Studies, said dealing to the Kiwi love affair with property would be most effective way to help stop bubbles in the future

She told LVR restrictions were likely to be effective only for a matter of months.

"Reality is anytime you put rules in place, those who have an interest in doing so look for ways to get around those rules. So whatever you put in place, it’s likely to only be effective for a period of time,” Matthews said.

“Because for a period of time people aren’t going to worry too much about it. They’re just going to get on with things,” she said.

"It’s simply the way the market is. It’s just the fact that New Zealanders like property. Unless you can get to the point of actually stopping prices going up, and I’m not convinced this is what’s going to do it, you’re not going to stop that love affair.

“The reason New Zealanders keep investing in property is because they look back over history, and for some time now they’ve just seen property prices basically going up. Yes, in some areas outside Auckland they do go back from time to time, but not by a huge amount, not generally for a long time," Matthews said.

“So they just see the capital gains. It’s more likely the capital gains-type taxes on rental properties are more likely to have an impact," she said.

The policies could also lead to higher rents, as tighter requirements were placed on mortgage lending.

"That just makes it harder for people to get into their first home because they’re paying so much rent, and therefore can’t save as much,” Matthews said.

“A lot of the people you’re going to be harming are those first home buyers. They’re the ones who tend to not have the big deposits. So you’re just making home ownership more unaffordable for those who want it," she said.

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Q: When is a bank not a bank. A: When it lends to other peoples rules.

A way to curb high LVR residential lending is to crack down on the Lenders Mortgage Insurers. (tell the banks they are not able to accept LMI).

Banking is different, most residential buyers when faced with a large amount of money, emotions running high about a place they want to buy, will do whatever the bank says, some even whatever the mortgage broker says and some unfortunately whatever the real estate agent says ......

Point being, the banks know high LVR lending often ends in tears, so, they lay the risk off to the LMI and make the punter pay the premium....……


Look at Genworth's NZ risk matrix:…


Income wise the residential lending is backed by the "cross section" of emplyment payments in NZ.



You can rest assured that there will be no way that the tools outlined in this item will ever be initiated while National are in power.

It would be more damaging for first home buyers than anyone else. All the people who have no or little mortgage debt will still be able to acquire multiple properties.



Alex - sorry mate, but to be the kind of journo NZ needs you need to be a little more pentrating than you have in response to this:


"... LVR restrictions were likely to be effective only for a matter of months."


Please can you get back to Claire and ask her to say why. Specifically and with detailed evdence to back up what she has said. Then, because Claire is obviously (no offence Claire) of the intelligence to know how, ask Claire how regulators might prolong effectiveness, and maybe refer her to how Texas do things, re. LVR. Texas have been effective in this regard for a long time, notwithstanding their more liberal planning regs - Phil Best will back this up. We did the arithmetic of the effect of relevant ratios a while back.


Penetrate, Alex, penetrate.


Cheers, Les.


What about the banks that don't utilise LMI.   They get back to lending basics, character of the customer, capacity to repay the loan, security only lets them sleep a bit easier at night.


Jimmo, you are on the right track.

I'm better to lend to some one who can't pay, rather than won't pay - thye should say ...


All these banking tricks (mixing banking and insurance etc), they call innovation, that takes banking as a profession away from its foundation, i.e. the name of the lend.