By Bernard Hickey
The Reserve Bank of New Zealand has detailed in its half yearly Financial Stability Report (FSR) that it is seeing early signs that its high LVR speed limit is changing market behavior.
But it said it was still too early to say if the limit on mortgages with a Loan to Value Ratio (LVR) of over 80% was working to reduce the over-valuation of New Zealand's housing market and therefore reduce risks in the banking system.
"The early evidence shows that banks have significantly reduced high LVR lending approvals, while increasing the cost of high LVR loans," Governor Graeme Wheeler said in releasing the FSR.
"However, it is too early to assess the impact of the measures on house price inflation," Wheeler said.
However, the bank did say in its report that there was little evidence to suggest a material amount of housing activity had been brought forward before the policy took effect on October 1. It also pointed to the BNZ REINZ survey from early October showing declining housing market activity, with fewer people visiting open homes and lower auction clearance rates.
The bank said there would be a degree of market volatility over the next few months. "It will not be until property market activity settles down in a few months time that a clear view of the impact of the restrictions will emerge," it said.
The bank reiterated throughout its report that New Zealand's housing market was over-valued and vulnerable to a correction, even more than it was after the 2002-08 boom.
"If unchecked, further near-term growth in house prices increases the likelihood of a disruptive adjustment in the housing market," the bank said. It reiterated that the high LVR speed limit was a temporary measure that depended on the bank's assessment of its effectiveness in dampening housing-related credit growth and house price inflation.
"These restrictions will be removed once there is evidence that significant imbalances in the housing market have abated, and the Reserve Bank is satisfied that their removal will not ignite housing-related credit growth and house price inflation," it said.
It did not detail the thresholds for when it viewed the imbalances as having abated. It warned again that the Reserve Bank expected to increase the Official Cash Rate by 2% "from 2014 to the beginning of 2016."
The bank repeated that it did not expect the high LVR policy to materially inhibit new house building, but that it was gathering data on new house building to assess its effectiveness. "The Reserve Bank may also remove the restrictions if the speed limits are not achieving the stated objective of reducing systemic risk, or if the distortions that arise from the restrictions outweigh the benefits."
News conference
Later in the news conference Wheeler again downplayed the impact of the high LVR policy on new building, but left open the option of an exemption. He said high LVR loans for new home builds had been about NZ$60-80 million a month or just 2-3% of new mortgage lending.
"While there might be some immediate impact, we expect the demand for new housing to remain strong," Wheeler said.
Later when asked about the Reserve Bank's thresholds for deciding when to end the high LVR policy, Deputy Governor Grant Spencer said the bank was looking at a variety of evidence.
"We don't have a red line or well defined thresholds," he said.
Also when asked about the Reserve Bank's approach to using interest rates to control asset bubbles, Spencer pointed to the bank's Policy Targets Agreement, which gives scope for the bank to take asset values into account.
"There might be situations where Monetary Policy does need to take account of leaning against a housing cycle," he said, emphasing that the bank would only lean against any bubble, rather than burst it.
Elsewhere, the Reserve Bank's Head of Macro-Financial, Bernard Hodgetts, said the bank had yet to receive data from the banks about how their high LVR lending was tracking within the new speed limit framework. Hodgetts said banks may actually be above the 10% limit in the first month or two as they worked off pre-approvals.
"It will be March before we can reasonably assess how the system is travelling relative to the speed limit," he said.
Also, Spencer said the bank did not see reductions in mortgage rates for sub-80% borrowers in recent weeks as a defacto easing of monetary policy.
"Overall bank margins are normal," he said.
(Updated with comments from news conference and attachment to statements)
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