The 'successful' use of loan-to-valuation ratio caps on home loans in Sweden, where there are some interesting comparisions with New Zealand

The 'successful' use of loan-to-valuation ratio caps on home loans in Sweden, where there are some interesting comparisions with New Zealand

By Gareth Vaughan

You're the regulator in a country where the percentage of your banks' loans to households has doubled in the space of 15 years and where the ratio of household debt to personal disposable income has reached a record high of 163%. So what do you do?

Simple. You do what New Zealand's Reserve Bank seems reluctant to do and you introduce loan-to-valuation ratio (LVR) caps on home loans.

That's what Sweden did in 2010.

"The main purpose was to address consumer risks arising from vulnerability of highly leveraged households to adverse development in the housing market. Finansinspektionen (the Swedish Financial Supervisory Authority) wanted to stem an unsound trend in the credit market where credit institutions would use ever-increasing loan-to-value ratios to compete," a Finansinspektionen spokesperson told

"There is a risk that such a development will expose consumers to unacceptable risks and eventually damage the confidence in the credit market as a whole."

Sweden, like New Zealand, was one of few developed countries whose house prices didn't fall significantly during the 2008-09 global financial crisis. By 2010, 35% of total outstanding bank loans in Sweden were to the household sector, up from just 18% in 1995. And from the mid-1990s the ratio of household debt to personal disposable income steadily climbed, reaching a record 163% in 2010. And mortgage debt as a share of household income rose from 73% in 1996 to 145% in 2010.

Here in New Zealand 56%, or NZ$178.6 billion, of bank lending is in residential mortgages according to Reserve Bank sector credit data. And as of September 30 last year, our household debt to disposable income ratio was at 142.8%, down a bit from its 2009 high of 153.4%.

But back to Sweden. As the International Monetary Fund (IMF) puts it, after experiencing a severe economic and financial crisis from 1991–93, Sweden rebuilt its economy by implementing drastic reforms. In moves reminiscent of New Zealand in the 1980s, the fixed exchange rate regime was abandoned for a free floating currency, and a rules-based fiscal framework and inflation targeting regime were introduced. The introduction of inflation targeting in 1993 led to a decline in interest rates that improved debt affordability.

LVR caps were introduced on October 1, 2010. On new loans, or where existing loans are increased with residential property used as collateral, the cap is set at 85% of the value of the collateral.

"The LVR regulation has been successful in reducing the vulnerabilities of households," the Finansinspektionen spokesperson says. "The banks have become more restrictive to issuing new loans with high LVR ratios. We have also seen a reduction in the average LVR ratio for new loans, as well as the decrease in the pace of credit growth."

Sweden is a country where the average LVR ratio rose to 55% at the end of 2010 from 10% in 1995. And before the 85% LVR cap was imposed, the average LVR ratio on new-lending had risen to 75%.

The role of covered bonds

Another aspect of interest in the Swedish situation for New Zealand is the introduction there of covered bonds in 2004, something the Reserve Bank here has allowed New Zealand banks to issue since 2010. In Sweden from 2004, the IMF says, there has been a significant pick-up in mortgage lending.

 "Under the Covered Bond Act, investors are secured by double recourse (as are holders of covered bonds issued by New Zealand banks)  - meaning that they have recourse to both the collateral pool backing the specific covered bond programme and to the estate of the bank on its default. Since then, the outstanding (Swedish) stock of covered bonds has risen from 40% of GDP to over 160% of GDP," the IMF says.

"The amount of covered bond issuance as share of total mortgage lending has doubled to 80% since 2006. Also, funding costs of covered bonds are cheaper than alternative means, including senior debt issuance, which has contributed to lower mortgage interest rates, in turn stimulating mortgage demand."

New Zealand's big four banks, led by BNZ, have borrowed more than NZ$11 billion through covered bonds since 2010 and Kiwibank is now poised to join them. The Reserve Bank says banks may each use up to 10% of their total assets as collateral for covered bonds.

LVR caps the only 'new' tool the Reserve Bank is considering

LVR caps on home loans are but one of  four macro-prudential tools the Reserve Bank is currently consulting on. But of the others, the core funding ratio has been in use since 2010, the Reserve Bank says it'll be prepared to introduce a countercyclical capital buffer from next year as part of the global Basel III bank capital adequacy reforms, and the fourth, increasing bank capital in response to sector-specific risks, was implemented on lending to the farming sector in 2011

So giving itself scope to implement LVR caps on residential mortgages is really the only new tool the Reserve Bank is considering adding to its toolbox.

But in its consultation paper the central bank lists a range of concerns about, and potentially side effects from, implementing LVR caps. These include favouring wealthy home buyers/investors over first home buyers, arbitrage through unsecured, non-mortgage top-up loans, and a risk of "leakage" to the unregulated sector and foreign banks should there be an increase in new lending by the non-banking sector. 

And bank lobby group the New Zealand Bankers' Association pointed out another concern, with its CEO Kirk Hope raising the issue of mortgage lenders insurance. 

"LVR comes down to the relationship between restrictions and what is underlying that by way of an insurance market," says Hope.

He notes that in Canada and Hong Kong, where LVR caps are in place, the government plays a major role in lenders mortgage insurance meaning high LVR risk is transferred onto the government’s balance sheet, something our government is highly unlikely to want.

Whilst  government sponsored insurance is available in Sweden, according to Finansinspektionen, its use isn't widespread.

LVR caps are, or have also been, used in the likes of South Korea, Singapore, Thailand, Israel and Norway. Even if the Reserve Bank, Finance Minister Bill English and Treasury give the Reserve Bank the power to use them here, the central bank may choose not to do so. And even if they were used here, it's likely it'd be a rare occurrence and for limited periods of time.

Major issues to mull, including possible crack-down on overseas investors buying existing NZ houses

Certainly high LVR home loans have returned with a vengeance over the past couple of years. Analysis by shows the country's big five banks, combined, grew residential mortgages where the borrower has less than 20% equity by NZ$3.3 billion, or 10%, during 2012. Home loans with LVRs above 80% are now up NZ$4 billion, or 12.5%, to NZ$36 billion since the Reserve Bank first mandated the banks break down their home loan books by LVRs in 2008.

As of December 31, borrowers had less than 20% equity on 24% of ANZ's residential mortgage book, or NZ$12.9 billion worth of loans.  ASB was at 21%, or NZ$8.2 billion, Westpac at NZ$8.5 billion, or 24%, BNZ at NZ$4.1 billion, or 14%, and Kiwibank at NZ$2.3 billion, or 19%.

Nonetheless, there are some serious issues, on top of the concerns aired by the Reserve Bank in its consultation documents, to consider.

For example, if used right now, would LVR caps even be needed outside Auckland and perhaps Christchurch?

And ought there be an exemption for first home buyers, perhaps the biggest users of high LVRs, and a group no political party will want to be seen to be "locking out" of the housing market? Remember that, based on January's median Auckland house price of NZ$509,350, first home buyers would need NZ$101,850 to have a 20% deposit.

And if a first home buyers exemption was introduced, how could the Reserve Bank make sure it wasn't rorted?

And what about adding something the Reserve Bank's not currently considering but has been used elsewhere as part of macro-prudential frameworks, - restrictions on debt service-to-income ratios?

And if a massive house building programme suddenly kicked off in and around Auckland tomorrow, and/or our government decided to implement Australian style restrictions on overseas investors buying existing New Zealand houses, something the Green Party advocates, would the concept of LVR caps on home loans become irrelevant?

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Unlike the US, Sweden also has a high social safety net, so the Q is did that mean ppl could still pay their bills and keep spending somewhat, thus propping up the economy.

The Q is also have swedes tried to get around the LVR, and if so how so we can plug them.

Not directing this at you steven, but the RBNZ's / bank economist stance that we shouldn't implement LTR's because (some) people will (eventually) try and find away to (partially) get around them is silly.  If it stops 80% of the flow into higher value lending in 5 years time then it is worth while. 
The other silly argument is that when (if) we unwind these LTV ratios then it is possible / unpredictable if the market will heat up again.  WELL the market is already heated up so isn't that a moot argument?  And isn't that a question for then - and a question that will take into consideration the OCR, bank funding costs, house prices generally, etc?  And why do we have to undwind LTRs?  I don't think they ever should be at 95% - they aren't like the OCR which fluctuates with macroeconomic conditions.  They are sound lending principles.

I agree on silly....what it says is our legislators are incapable of writing laws properly if nothing else.
yep, we dont ever have to unwind them though.  The "norm" is described as 80% and even varying it 1~2% makes a huge difference so 95% is plain crazy. Yet our RB and Govns have let it get that way...even without LVR the RB has enough tools to stop that 95% stupidity yet did no, that is a huge failing IMHO.

Pointless discussion really...fact is the NZ govt wants us to think it has, through the reserve bank, control over what the banks are up to. Utter bollocks. It is the banks which have control and to date they have trapped the economy in a cheap easy credit property price bloating game....and they know the pollies are too gutless to throttle it. They also know which pollies are playing the game for fat gain.
There will be a token effort to show Joe Kiwi that the RBNZ and the fools in the Beehive are  aware of the reality the banks will be allowed to carry on boosting debt in the property market because the fools have no other policy for the future of the country.
Ditto the agricultural being milked by the banks...bloated with debt....utterly dependent on Bernanke's QE bubble.
And if you expect the media to expose the farce...fat chance.
The policy is to keep the game going.

Ok Wolly, let's just all go and stick our heads in the oven then.

I think Wolly's point is that is exactly what we seem to be doing.

My problem is that Wolly grizzles but offers no solutions. I'm simply bored with such drive by comments that add nothing.

Whew Gareth,  i've got to lump myself in there with the drive by squad, it's just there are so many quality commentors here nowadays like Hulme, Tull, Iconoclast,Kate, and so forth that they get on top of most topics and for the most part share my thinking on a number of topics.
Sooooo.....what's left..? to post yes...uh huh...uh huh, you go girlfriend..? or just a quick penny's worth to let you know we are alive, and maybe bring you a smile occassionaly.
Keep up the good work's really hot outside ain't it..? like a bloody oven.

Don't do that Gareth.....doesn't work, ya can't get the door shut, then ya start thinking about roast pork before any real damage can be matey, it's a no brainer.
Efectively Wooly's just echoing the frustration of think tank commentary without any real chance of  such thinking finding receptive and or sympathetic ears within the RBNZ's current agenda on housing correction proceedures, nor the Administration's, and Banky boy's hardly going to volunteer for the Swedish Rutabaga now are they....?
 Nothing wrong with the article at all and cudos to you for the research, it is appreciated and I'm sure Wooly meant no disrespect to you in that regard....
 Back to my bannana. 

Cheers Christov, enjoy the sun.

Kimy...banks like property because prices are supported by banks!...with the govt doing what it is told by the banks...and Wheeler doing what he is told by Tweak and Fiddle....the whole stinking credit game is a farce dependent on poor govt and cheap easy credit.

I think you about covered it there Wooly, when including your earlier post on the pointless discussion.
Any proposal that may cause a correction will directly impact on equity balance initially fueled by overlending on unrealistic market valuations, poor dilligence on the part of lenders in a scramble to grab their share of lolly from the eager leveragers,the bewildered investors,the desperate first homers.
This would lead to Banky boy in N.Z. having a serious case of exposure, not to mention a third of mortgages  (guestimate) rapidly going to the wall.
Snowball to an avalanche......sooo they're not having a bar of it no sireeebob, not giving that snowball a chance in..........................hell.! 
 That only leaves me to mimic in Swedish......får knulla ur min volvo !

Last week I also asked Norway's regulator about its LVR caps and got this emailed answer back overnight:

Please find comments to your questions:

1) when the LTV restrictions were introduced,
Finanstilsynet (FSA Norway) introduced guidelines for prudent residential mortgage lending in March 2010. The guidelines were further tightened in December 2011.

2) what they were set at,
As of December 2011 loan-to-value ratios should normally not exceed 85 per cent (reduced from 90 per cent in March 2010). Mortgages with projected liquidity deficit based on households' income and expenses, including a 5 percentage increase in the current interest rate level, should as a rule not be offered. In the case of loans in excess of 70 per cent of property value, downpayment should be required as from the first due date. For home equity release loans, the norm for LTVs is 70 per cent (reduced from 75 per cent in  2010).  In addition, banks shall regularly report to the management or board on the compliance with their own implemented guidelines.

3) why were they introduced, for example what problem you wanted to tackle,
The guidelines were introduced due households' rising debt burden, which is closely linked to continuing increase in residential property prices, high loan-to-value ratios and increased use of interest-only mortgages. The trend in residential property prices and  household borrowing give cause for concern.  Both financial stability and consumer protection considerations were behind FSA's introduction and tightening of the guidelines.

4) your assessment on how successful the use of them has been and what this is based on,
The guidelines have contributed to a more prudent lending behaviour on the part of banks. LTVs have come down, the share of interest-only-loans has been reduced, and loans with a liquidity deficit is being reduced. LTVs for home equity release  loans has also been reduced. This development is based on reporting, including FSA's home loan survey, and thematic and other on-site inspections. There is, however,  in FSA's view room for further improvement in banks' follow-up of the guidelines.

5) whether you have, or will be, making any adjustments to them,
The guidelines from December 2011 have not been changed, and there is as of today not an intention to further tighten or change the guidelines. Through the feedback to banks following the thematic inspections the FSA has made comments on the proper understanding in cases where banks seem not to have the correct interpretation of the guidelines or where the compliance is not satisfactory.

6) whether you have introduced any other macro-prudential tools, and if so which ones.
CRD IV may be implemented faster than the international timeline, and authorities will use the room for national discretion to address national financial stability concerns. As to the countercyclical buffer, this will be set by the Ministry of Finance. The central bank will have the primary responsibility for developing the basis for the decision. FSA has used pillar 2 actively under the existing regulation to address macroprudential concerns through the setting of pillar 2 capital requirements. The FSA has a particular focus on backstops to the fall in RWA due to the use of IRB models. Recently FSA has addressed in letters to the Ministry the low IRB risk weights on mortgages as well as possible measures to address i.a. possible procyclical effects of covered bond issuance and other forms of asset encumbrance.

Best regards,
Emil Steffensen
Deputy Director General, FSA Norway

Cool, when you look at those that have done a LVR, it would seem to be helping. 

Yep, "no longer able to enter the market at all!"  So the theory goes that prices cannot be bid up.  If you look at the first time buyers guide in OZ it would seem to have had a significant effect....but primarily can kciking and yet more over-value.
Looking at Steve Keen's comments the suggestion is a 80% LVR limits the leverage with a huge impact.  At the same time that extra $s also means the first time sellers looking for a bigger place cant leverage up as much this becoming "high risk".
It seems in-arguable that Texas's 80% rule has in fact been significantly responsible for reigning in the excesses in the property market. However there are other effects Ive seen no quantifying on like Texas is a  low wage state.

Don't forget that Sweden also has far lower rate of home ownership than NZ.
It's already been pointed out on this site many times that LVR controls would have more impact on first home buyers etc. as they tend to have less capital. So if you want LVR controls fine - but don't also moan about dropping home ownership rates. Everyone can't have everything. 

Also like 40% of Swedes live in apartments (imagine the moaning if that was the case here).

"No longer increasing home owner rates" might be a better way of describing it,  all else being equal.. Given the US housing boom, over-valuations, 40% losses and high mortgagee sales actually resulted in "dropping home ownership rates" anyway.

The overseas based investors who have caused a significant boost to Auckland prices either
1. Do not need a mortgage or
2. Raise any shortfall using an overseas based lender.
LTV changes are a total waste of time in this market.
The politicians don,t know or don't care so the discussion is irrelevant.

Augmented reality view and Well the Swedes know a thing of two:
I would certainly like to go somewhere, buy land and pay half as much as the locals.
The banks are making the most of their opportunity..
Look at this app the ASB use in Ozzz.
The Commonwealth Bank Property Guide delivers rich property insights on the greatest range of residential properties in Australia straight to your iPhone. With helpful tools, tips and calculators, as well as property hotspots and the new RP Data Automated Value Guide, making the right property decisions has never been easier.

Key features

Augmented reality view
Using augmented reality technology, the Property Guide takes rich data and maps it onto a real world view through your iPhone’s camera. It’s as simple as holding your phone up to a property to receive key insights instantly.

Search the greatest range of residential properties in Australia
The Property Guide app gives you access to information on more than 95% of residential properties in Australia. You’ll make smarter property decisions with data including past sales history, current property listings and recent sales. Please note that due to Victoria’s state laws sales data is only available on 40% of properties here.

RP Data Automated Value Guide
The RP Data Automated Value Guide takes a multitude of statistical market data and provides an estimated price range for 80% of the residential properties in Australia (over 70% of residential properties in Victoria).

Home buying guide
Learn about the home buying process with our step-by-step guide, covering everything from the search for the perfect property right through to settlement.

Home loan repayment calculator
If you’ve found a property you’re interested in, you can find out what your monthly home loan repayments might be using our repayment calculator.

Contact a lender or local agent
Ready to take the next step to property ownership? Call a lender from the app to make an appointment, or request a call back, plus contact local agents that service the suburbs you’re interested in to help you understand the value of properties in the area.


Fair enough for the RB to look at the risk profile of the banks lending. They are the regulator and responsible for the stability of the system. If you get beyond that and mix up concerns about housing affordability you get the sort of confusion evident in the discussion here.
If a bank has to sell a house and it has more than 85% of its value lent they will take a loss once selling costs and the likely devaluation of the property due to noone mowing the lawns etc  are factored in. If, however they have laid off the risk with a mortgage insurer they will be made whole and the system is not impacted. Why would the RB be worried about that?
As long as the RB are happy there is no systemic risk from high LVR lending they have done their job havent they?
We have full recourse loans here which means the lender or insurer can recover their loss from a borrower if the security is insufficient. It would make more sense for the bank to concentrate on the debt service models the banks use to asess loans and make sure there is enough of a buffer to ensure borrowers can pay up in the event of a shortfall. Restricting loan to value ratios for housing lending can make the lending more risky rather than less in some cases. Borrowers will empty all their piggy banks and arrange short term high interest loans on cars and other chattels as well as unsecured stuff to get into a home and the bank may not even know about some of this. The outgoings on an 80% home loan with 15% raised in all sorts of strange ways can be much higher and the overall loan much riskier than a 95% or even 100% home loan.

The point being that Sweden obviously know exactly what they are doing? That graph looks like they are just as clueless as us.

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