BNZ CEO Andrew Thorburn says putting loan-to-valuation-ratio restrictions on residential mortgages would just see investors, rather than home buyers, buy houses

By Gareth Vaughan

Setting limits on residential mortgage loan-to-valuation ratios (LVRs) wouldn't resolve housing affordability issues nor cool a heating Auckland housing market, BNZ CEO Andrew Thorburn says.

The Reserve Bank is researching the potential introduction of LVR limits along with three other so-called "macro-prudential tools" that it could implement in an attempt to clamp down on frothy asset prices and credit booms.

Thorburn told that although the LVR issue is an interesting one, housing comes back to supply and demand, especially in Auckland.

"Because the population is growing, and because particularly there's high demand at the say sub million dollar end, that demand is strong and is going to keep growing as more net migration comes in," said Thorburn.

"Let's say there is somebody who has got 10% equity, we do that sort of lending particularly for people who have got high cashflow. But let's say we couldn't do that. It (the house they wanted to buy) would just be purchased by an investor because people have to live somewhere, so the underlying demand's not going to change. It (the change) is just who buys it."

"So to me this comes to the issue of 'let's diagnose this properly' and I think one of the biggest issues is the supply issue. Because demand is high and rising and supply isn't keeping up with it. So whether it's group A that buys, or group B or group C, it's going to be filled by somebody," added Thorburn.

Banks growing mortgages with 80% to 90% LVRs

Three of the big four banks - ANZ, ASB and Westpac - have so far issued General Disclosure Statements covering the September quarter. All three show lending in the highest LVR category, above 90% meaning borrowers have a deposit of less than 10%, falling. However, all three grew home loans in the 80% to 90% LVR category where borrowers have deposits of between 10% and 20%. The same trend was on show at Kiwibank with 90% plus LVR residential mortgage lending down, and 80% to 90% lending up.

Reserve Bank Deputy Governor Grant Spencer said in May the central bank and prudential regulator of banks saw four instruments as "viable candidates" as macro-prudential policies to help reduce financial system risk. These are; 1) A Counter Cyclical Capital Buffer, which is an additional capital requirement that local bank supervisors may apply in a credit boom, and remove when the cycle is turning down. Such a buffer is part of the Reserve Bank's Basel III plans, which the banks are comfortably placed to meet, and will be in in place from 2014.

2) The Core Funding Ratio. Introduced in April 2010 as a move designed to reduce New Zealand banks' reliance on short-term overseas borrowing, this sets out that banks must secure at least 70% of their funding from either retail deposits, or wholesale sources such as bonds with durations of at least a year. Currently the Core Funding Ratio is set at 70%, but will be lifted to 75% from January 1, 2013. The banks are comfortably placed to meet the increase.

3) Adjustments to risk weights on sectoral lending (such as to the agricultural or residential mortgage sectors) used to calculate Risk Weighted Assets under the Basel capital adequacy regime.

4) Limits on LVRs.

'Macro-prudential policy in its infancy'

In its Financial Stability Report last month the Reserve Bank said research was continuing into numbers two, three and four above. It said temporary LVR restrictions could be used to address rising imbalances associated with rapid lending growth to specific sectors such as housing.

"While such instruments have the advantage of directly targeting sectors where systemic risk is building, they may also pose risks in terms of financial system efficiency and disintermediation (shifting lending towards entities not captured by the regulation). Internationally, macro-prudential policy is still in its infancy, and it remains to be seen which instruments become prevalent," the Reserve Bank said.

"The Reserve Bank is reasonably advanced in its macro-prudential policy development, and is drawing on the experiences of other countries as it refines its framework. As part of this process, consultation on the remaining aspects of the macro-prudential framework will be undertaken in due course."

The Financial Stability Report said decisions on macro-prudential interventions would require a considerable degree of judgement.

"The Reserve Bank considers that current conditions in credit markets do not warrant any macro-prudential intervention...While the Reserve Bank is the organisation primarily responsible for macro-prudential decision making, consultation with other key stakeholders such as the Treasury is an important part of the broader decision making framework. The Reserve Bank is currently working with Treasury and the Minister of Finance (Bill English) on specific aspects of macro-prudential governance and accountability."

Neither Bollard, Wheeler nor Key keen on LVR restrictions

Despite Reserve Bank staff looking into the possible use of LVR restrictions, all of recently departed Reserve Bank Governor Alan Bollard, his successor Graeme Wheeler, and Prime Minister John Key, have poured cold water on their likely use by the central bank to cool an overheating housing market.

Meanwhile, Thorburn said if you look at bank losses from loans gone sour over the last five years across housing, credit cards, small business, agriculture, corporates and commercial property, housing losses would be the lowest.

"The banks are not going to take excessive risk here and lend to all sorts of people who can't afford it for the sake of making profit. It just doesn't make sense," said Thorburn. "You're trying to build a long-term business and I think we've made good decisions because the write-offs are very, very, very low."

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And Turkeys don't vote for xmas!
Thorburn knows very well his salary and bonus hangs on the bank flogging as much cheaper for longer credit as possible way will he argue in support of LVR controls...

If supply is the solution to housing affordability...then why did some cities with good land availability experience soaring values in the 2000's? Such as Dunedin etc..
The link below does a good analysis of physcial and financial reasons for unaffordable housing:
There is no silver bullet, but LVR controls would be a good compliment to supply side reform. That's what Germany does:

Good question. House prices roughly doubled between 2004-07 even in cities with static populations and no barriers to land supply. It was solely down to increased access to credit. House prices could easily drop by 50% in those centres should a recession kick in and ability to repay a mortgage was compromised.

Of course Asians carrying bags full of hot money do not require any help from our banks.
We need to take that money out of the equation. Just today HSBC get done for US$1.9 billion for turning a blind eye to that same cash.
Action needed by Key and his mates. Fat chance!

Interesting article in the Telegraph discussing property investment/ownership and renting. Very similar to the current Auckland enviroment,

I'm no banker - but could somebody explain to me what this means?
"Let's say there is somebody who has got 10% equity, we do that sort of lending particularly for people who have got high cashflow. But let's say we couldn't do that. It (the house they wanted to buy) would just be purchased by an investor because people have to live somewhere......"
....and why it makes house prices go up?

"why it makes house prices go up?"
It's just human nature in all it's stupidity I guess - house prices go up because house prices go up. And that's just the way the PTB like it.
Let's not kid ourselves; the last thing JK, RBNZ and the Big Banks want is a house price collapse - not on their watch anyway. The reason is our ongoing current account deficit and the associated claims foreigners have over the current assets and future earnings of us Kiwis. Most of these claims are secured against one or the other, directly or indirectly. The indebted Kiwi households are the Milch Kine that keeps on giving to fund that deficit, they default and the country defaults. Simple as that.

You're right, it's silly. And it would work just fine. The fact that there are people who now couldn't afford that house reduces competition for that house and reduces price. The fact of the matter is that in that scenario, the borrower would have been competing against that same property investor for it, whereas now the property investor can get it with less competition, which generally means a cheaper price.

I wonder whether the RBNZ has looked/is looking at the possibility of implementing LVR restrictions but excluding first home buyers?

As soon as you see a bank head arguing against a macro-prudential tool to control an asset bubble you know that the reserve bank must be onto the right track.
Of course demand is rising when the banks are back lending at 100% of values. The best way to curtail this demand is to ensure only those who can afford to buy the home can buy one with a suitable deposit.
I do agree with one thing Thorburn said in that concentrating on just the demand side will not solve this but as we know the housing affordability is complex and needs to be tackled from both sides but saying it won't work because of the lack of supply is pretty disingenuous. What he really is saying is that they don't want their addressable market shrunk so they can continue to milk super-profits from the debt-soaked populace.

Simple, two-part answer here. 
1 - The GumNut (Labour, remember them?) went and tried to be helpful to its electoral supporters, by dollops of Other People's Money.
Specifically, allowing the first $100K of a house loan to be approved to anyone who had a pulse.
Instant result:  every seller added - oh, around $100K, spookily enough - to the value of their existing property when it came to sell it.  After all, who's gonna turn down That sort of untaxed, instant CG?
Universal pricing signal is what the policy actually accomplished.  Great for the sellers.  Not so hot for the Buyers.
2 - the LG Amendment Act 2002 went through (Sandra Lee was the perp, here) and granted TLA's the Four Wellbeings:  social, cultural, economic, environment.  Sustain, protect, enhance and generally give carte blanche for the spenderista.
And boy, did those TLA's spend!
Plus, levied all manner of non-rates on anything that seemed to be able to afford it:  greedy developers ('contributions'), builders (fees), and so on.
In fact it unleashed what Matt Taibbi later described in an only slightly different context as a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money".
So that toxic combination of ridiculously easy credit plus rampant price inflation caused by free-spending local gumnuts, plus let us not forget:

  • land-banking
  • Planning principles which provide instant CG if'n yer Piece of Paradise just happens to be next to an urban boundary or squiggle-on-map
  • Materials duopoly to which ComCom turns Nelson's eye
  • Licensing up the wazoo for everyone connected to the building indutsry

has inevitably resulted in three trends:

  • Sharply lower supply (it's just too hard and expensive to bother with cheap new builds, so the bottom rungs just vanish and everyone builds for the mid to top end)
  • Sharply higher prices, as supply and demand fail to match and average age of the housing stcok increases  plus its overall quality drops or stagnates.
  • Perma-lockout for first home buyers as the Median Multiple drives higher and higher....

I've described local government as economically clueless....  that's probably being kind, as the fools cannot see that they are a very major driver of all this mayhem, even unto this very day.

Perhaps the "fools" in local government are fully aware of what they're doing. A big part of New Zealand's house price problem is that Kiwis sincerley believe that high house prices are a good thing, because most of them have a vested interest in the market.
Take a look at any herald article cheerleading stupendous year-on-year increases - it's all spun in a very positive manner and in my experience most Kiwi's lap it up - We're all getting richer bro!
I've had conversations with otherwise intelligent people that believe that 10% y-o-y  is here to stay and I best get on board before I can't afford it. When I mention that they'd need to borrow thirty times household income to buy in 2032 they just kinda glaze over.
Until sentiment shifts and the sheep are spooked this insanity will continue.

I totally second the thought that when competition increases, the price eventually decreases. That is a very common tactic and trend that we often see in the housing industry and I think is the only period that we can actually get to see a price plunge (even though not huge). This is also partly caused by the increasingly ease of obtaining a mortgage loan. Banks and financial institutions are ready to lend huge amounts of housing loans to potential homeowners, thus housing investors feel that there is no need for them to reduce the housing prices.