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RBNZ could keep home loan LVR restrictions, and potentially other macro-prudential tools, in place for years

RBNZ could keep home loan LVR restrictions, and potentially other macro-prudential tools, in place for years

By Gareth Vaughan

With the Reserve Bank to implement restrictions on banks' high loan-to-value ratio (LVR) home loans from October 1, a key question is how long the restrictions, and/or other macro-prudential tools might be in place.

There are no set time periods and it could be years rather than months.

Reserve Bank Governor Graeme Wheeler says from October 1 banks will be subject to restrictions on high LVR housing loans, which are loans where the borrower has a deposit equivalent to less than 20% of the property purchase price.

Banks will be required to restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the dollar value of their new housing lending flows. Allowing for various exemptions, the Reserve Bank estimates the 10% speed limit will effectively limit the banks’ high-LVR lending flows to about 15% of their new residential lending.

Wheeler yesterday reiterated that around 30% of banks' new residential mortgage lending has been going to borrowers with less than a 20% deposit. In the year to June overall housing loans grew 5.4%, according to Reserve Bank sector credit data. That compares with double digit growth between 2003 and 2008.

How long for?

In his speech announcing the policy Wheeler said; “How long LVR restrictions may remain in place depends on the effectiveness of the measures in restraining the growth in housing lending and house price inflation. LVR limits will be removed if there is evidence of a better balance in the housing market and we are confident that their removal would not lead to a resurgence of housing credit and demand."

He added; “An important issue is how long LVR restrictions might be imposed. This largely depends on the effectiveness of the measures in restraining the growth in housing lending and house price inflation. The measures will be removed if there is evidence of a better balance in the housing market and we are confident that their removal would not lead to a resurgence of housing credit and demand."

"We will monitor closely the impact of the restrictions, and report on that in our Financial Stability Reports. If the measures are not considered to be effective (and cannot be made effective through altering the details of the policy) they will be removed, but in this case their removal might necessitate higher interest rates than otherwise, or the imposition of alternative macro-prudential requirements.”

With interest rates at 50 year lows, inward migration rising, and housing shortages in Auckland and Christchurch, restricting bank credit supply may not reduce house prices significantly any time soon. Wheeler yesterday noted house prices are up 16% and 10% in Auckland and Christchurch, respectively, over the past year. They're up 4% over the rest of New Zealand, he added.

In its regulatory impact statement accompanying yesterday's announcement, the Reserve Bank said one scenario that could trigger the removal of LVR restrictions was a "soft landing" in the housing market, where house price growth moderates without resulting in a sharp correction.

"In this situation, the Reserve Bank would need to carefully weigh the efficiency benefits of removing the restriction against the possible risk that this might stimulate an overly aggressive return of risk appetite to the market. A persistent moderation in household credit growth or improved mortgage lending standards would argue in favour of removal," the Reserve Bank said.

Alternatively, LVR restrictions could be removed if there's a "sharp correction" in house prices.

"Here there is a clearer case for promptly removing any restrictions, given that there is little risk that any removal would result in overly buoyant risk appetite, assuming lending would tighten in a downturn. There is strong evidence that having an LVR restriction in place during the boom period strengthens the resilience of the financial system, but it is unlikely that the removal of LVR restrictions would have a significant impact in the midst of a correction in house prices."

The RBNZ would've used macro-prudential tools from 2005, perhaps until 2009

In a theoretical example a recent Reserve Bank Bulletin article suggested if the central bank and prudential regulator had been able to implement macro-prudential tools such as LVR restrictions in the past, it might have done so from 2005 until late 2008, or even into 2009.

The article was by Chris Hunt, an advisor in the Reserve Bank's financial markets department, and was entitled The last financial cycle and the case for macro-prudential intervention. In it Hunt said there would've been a compelling case for macro-prudential intervention from 2005 onwards to attack a build-up of systemic risk in the financial system.

"What we can say, with some degree of comfort, is that our indicator framework would have been signalling a concern with the build-up in systemic risk, particularly from 2005 onwards. At the very least the Reserve Bank would have been seriously considering macro-prudential intervention around this period," Hunt wrote.

"The application of LVR restrictions may have been appropriate in the context of the decline in lending standards over 2006 and 2007," Hunt added. "Sectoral tools could also have been deployed in response to much earlier signs of imbalances, perhaps over 2003 or early 2004 in the housing or agricultural sectors."

Hunt said any core funding ratio buffer in place would've been released first, with complete removal likely by late 2008 following the September 2008 collapse of Lehman Brothers.

"In terms of releasing any capital buffers, had they been in in place, it is likely this may have been undertaken in early 2009, or possibly late 2008. In the 2008 May Financial Stability Report the Reserve Bank saw a ‘prudent’ re-pricing of risk as banks passed on higher funding costs, although it was noted that there was a risk that if credit conditions tighten excessively the slowdown in economy will be exacerbated."

"Non-performing loans ticked up modestly over 2008. By May 2009 a material decline in asset quality had occurred, although from a low base, and there was an expectation of a further deterioration over the course of 2009. In addition, there were increasing reports of some borrowers facing difficulties obtaining credit. The Reserve Bank reiterated the message that banks should not tighten lending criteria excessively," wrote Hunt.

The other three macro-prudential tools, which could be applied to registered banks on a temporary basis - even at the same time LVR restrictions are in place - and wouldn't affect existing loan agreements, are:

1) The countercyclical capital buffer, effectively banks holding more capital during credit booms;

2) Adjustments to the minimum core funding ratio, altering the amount of retail funds and longer-term wholesale funding banks have to hold. And;

3) Sectoral capital requirements, or increasing bank capital in response to sector-specific risks.

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This whole LTVR restriction  is a load of codswallop .
REUTERS  have just reported that Mortgage lending in the UK is the highest since OCTOBER 2008
 Property markets everywhere are flying , even in the UK which is still in semi -recession

Property is the only game in town. Has been since 2000. There are no longer enough real growth opportunities on the planet, to keep everyone happy, so inflation of existing real estate is the only game in town, and this is 'round two'. There isn't enough art, and there aren't enough red left-foot size 7 jandals to inflate, so housing is all there is. More Dream Home hype fanning the flames, more 'the economy is on the move' hype, and we just blew the balloon up even further.
Stand back.

The real problems are rigged land supply and building material markets on the supply side combined with sales to foreign purchasers, wholesale legal and illegal immigration on the demand side.  If the Government was doing it's job properly the LVR provisions would not be neccessary, but what else can the Reserve Bank do.  By continuing to ignore most of these factors and only blow hot air on the rest, one has to assume that they are complicit in promoting house price inflation.  The present government is in the driving seat and have been for 5 years so it is totally their responsibility, they have nobody else that they can blame. 

Wheeler has made big mistake by trying to curb demand for finance , when the real demand is for somewhere to live .
He will fail dismally if he thinks this will stop people seeking a home to buy.

Hmmm - so when the Politicians get sworn in to Parliament, do they not undertake to hold up the Rights and Liberties of the subjects? What constitutes an ancient right?  Historically people have been able to borrow whatever amount they can afford to service and now this right is being taken away. Is the right to own the roof over your head being taken away?
From the Bill of Rights 1688

Subjects' liberties to be allowed

  • Now, in pursuance of the premisses, the said Lords Spiritual and Temporal, and Commons, in Parliament assembled, for the ratifying, confirming, and establishing the said declaration, and the articles, clauses, matters, and things therein contained, by the force of a law made in due form by authority of Parliament, do pray that it may be declared and enacted that all and singular the rights and liberties asserted and claimed in the said declaration are the true, ancient, and indubitable rights and liberties of the people of this kingdom, and so shall be esteemed, allowed, adjudged, deemed, and taken to be, and that all and every the particulars aforesaid shall be firmly and strictly held and observed, as they are expressed in the said declaration; and all officers and Ministers whatsoever shall serve their Majesties and their successors according to the same in all times to come:


wouldn't be an issue if they let the market set interest rates. Low rates cause a bubble in house prices, this is the next lever that gets pulled.

AJ - you are correct. The market is an ancient right is it not?
I am questioning whether the Politicians and bureaucrats given they take an Oath of Allegiance to guarantee that they will protect the Bill of Rights 1866 can interfere in the markets as they do.
If you make a promise to abide to uphold the principles outlined then do not uphold those principles you have broken the promise.
Where are the journalists hiding? Do they not understand the implications of erosion of rights?  If markets are left alone to their own devices the subjects can get on with things and the country prospers.

Well its not the RB then is it as the market can. There is no reason a bank has to follow the OCR, at least one CEO has said that.  Ergo the market / bank can set a higher rate if it so chooses but they have historically let the RB take the flak.
That same CEO has said their funding wont get much lower and therefore the OCR may continue to drop but the retail rates wont.

Taking this Oath should guarantee that the Bill of Rights 1866 is adhered to.

Oaths and declaration Act

Part 3
Promissory oaths and affirmations

17 Oath of allegiance

The oath in this Act referred to as the oath of allegiance shall be in the form following, that is to say:
I, [specify], swear that I will be faithful and bear true allegiance to Her [or His] Majesty [specify the name of the reigning Sovereign, as thus: Queen Elizabeth the Second], Her [or His] heirs and successors, according to law. So help me God.


Wheeler's mandate is to promote regulatory instruments to help reduce the systemic risks that occur through boom bust cycles.
Essentially their aims are to

  • building additional resilience in the financial system during periods of rapid credit growth and rising leverage or abundant liquidity; and
  • dampening excessive growth in credit and asset prices.

That is their job. This has nothing to do with stopping people be able to buy a home (although that may be an outcome) and everything to do with ensuring our financial system doesn't collapse as a result of a housing market bust.

Why would they ever remove these restrictions? They make our banks safer, prevent people from getting into excess debt, and potentially keep a lid on house prices. Granted some Aussie banks would make a bit less profit - but why do we care?

In a sane world I would agree.  You should not be buying a house with less than 20% deposit.  Unfortunately the property market is anything but sane, free, compedative or open with the result that house prices inflate faster than most can save.  Accordingly one can understand the sense in purchasing with the minimum deposit.  As stated many times before the real solution to this madness lies in addressing the root causes.

Zanyzane - the whole global market is suffering distortions.
The one thing in common is Politicians and Bureaucrats world-wide.

Oh what rubbish....the common things are huge private debt overhangs ppl have freely taken on. Expensive energy making BAU and growth history, hence repayments. Ever decreasing bank control, both legislation and the wielding of it.  Wonky economics, ie expansionary austerity, or voodoo economics aka Ronald Raygun ie politiclly derived "economics" from right wing pollies based on no real school of economics but what they would like to see.


There is a big difference between a bank settting a lending restriction on a business and the enforced LVR by the RBNZ.
The bank requires certain information to make an assessment. The RBNZ's LVR makes no distinction between income levels of individuals. The broad blanket approach has implications for many individuals who have high incomes but haven't saved a deposit as yet.
If you are young but have high income you are being penalised by this policy as you you are enforced to save for a deposit while paying rent.

But how safe is that high income? Anyone can lose their job at any time, right?  So it makes sense for banks to require reasonable equity regardless of income. Unfortunatley the banks know that they will always be bailed out if it all goes sour, so regulation is the only way to enforce them to make sensible lending decisions!

Jimbo Jones - if a bank were to get into trouble in NZ then the OBR will be implemented and that means it is local depositors who will be bailing them out. Hardly fair when the covered bonds will not be affected is it?  Local depositors should be able to obtain security over their deposits. This would ensure the banks have the assets and income. Why are banks treated so differently to every other commerical enterprise when it comes to client contracts?
There is not a day that goes by when a business in NZ is not bending over backwards wearing the costs of compliance for some called valid reason that some bureaucracy has implented and no one ever checks up on the bureaucracy to see what the outcomes are.  Too many people staring at the windscreen instead of having a road map of where they want to go.
There are many things that could be done to ensure financial stability without affecting ordinary NZ'ers who end up carrying the can for incompetent legislation. What if you opened up the banking sector so that it is easies to form a bank and that way get some competition going.
The more we force things upon people the more they will find ways to adapt and this leads to new issues down the track. There is far too much State control in the wrong areas and the fact of the matter is this is what has driven up house prices in the first place.  Why not stop the tax treaties for a kick off and income derived in NZ taxed in NZ? That way the banks would be contributing to the NZ coffers. At least NZ would get something out of the profits along the way.  Should banks be able to sell off the mortgage instruments? Or should they have to hold them as collateral? Or should the RBNZ hold them as collateral?
NZ is a tiny country trying to compete in a global economy which is meant to be a free-market. however our goods like our agriculture product sell in the free-market against products which are heaviy subsidised. How much of this heaily subsidised income ends up in NZ purchasing land and houses? Or how much money comes from other sources that are dubious by nature into the housing market here? The locals in NZ are being screwed because other locals want regulation and some of that regulation is just plain old not worthy of having.

Of course someone should pay a deposit.
If the borrower has a high income the banks will fall over themselves to lend the other 90%.
No change there.

Here's a nice opinion piece from TVNZ's Nadine Chalmers-Ross on the LVR restrictions from a first home buyer's perspective -