High LVR lending halves in just 1 month

Property

RBNZ says banks reduced low equity mortgage lending to 11.7% of total new mortgage lending in October from 25.5% in September

28th Nov 13, 12:00pm by Gareth Vaughan

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

Banks' high loan-to-value ratio (LVR) residential mortgage lending more than halved in October from September, the Reserve Bank says.

New statistics issued by the Reserve Bank show high-LVR lending, excluding exemptions, fell to 11.7% of total new mortgage lending in October. Exempted lending accounted for an additional 1.1% of total new lending. The high-LVR lending share was down from 25.5% in September and had been around 30% earlier in the year, the Reserve Bank says.

High-LVR "speed limits" were introduced by the Reserve Bank on October 1. Banks must limit lending at LVRs above 80% to no more than 10% of their total new mortgage lending. This 10% limit excludes high LVR loans made under Housing New Zealand’s Welcome Home Loans scheme, the refinancing of existing high-LVR loans, bridging finance or the transfer of existing high-LVR loans between properties.

In a statement Reserve Bank deputy governor Grant Spencer said the October result showed banks were adjusting to the new policy and were well placed to meet the speed limit, which will initially be measured as a proportion of total new residential mortgage lending over the six-month period from October 2013 to March 2014.

“The reduction in high-LVR lending will help to reduce the risks of a sharp correction in house prices in an already overvalued housing market. Such a correction could be damaging for the financial sector and broader economy,” Spencer said.

“The banks are having to manage a pipeline of loans that were pre-approved prior to the LVR restrictions taking effect. The share of high-LVR lending is expected to fall further over the coming months as these pre-approvals run down," he added.

“While there has been a significant reduction in high-LVR lending already, it is too early to assess what impact this is having on aggregate housing market activity and credit growth.”

LVR limits creating 'shift in the composition of home buyers'

Westpac senior economist Michael Gordon said the fall in the dollar amount of high-LVR lending has been partly offset by an increase in low-LVR lending. Figures released by the Reserve Bank (see chart below) show high LVR lending down $566 million between August and October, and lending at LVRs below 80% up $739 million.

"This may reflect seasonal patterns to some degree, but we suspect that a large part of the increase is genuine. This is important as it suggests that the LVR limits have led to a shift in the composition of home buyers, ameliorating the overall impact on the housing market," said Gordon.

"We predicted that the nature of the speed limits would lead to a bifurcated market, where lenders would not only try to ration demand for high-LVR loans, but would push to grow their low-LVR lending (so that they could make more high-LVR loans within the 10% speed limit). We concluded that lower mortgage rates, along with reduced competition from first-home buyers, would create quite favourable conditions for those investors able to muster up a large enough deposit. Consequently, we expected only a modest impact on the rate of house price growth," Gordon added.

When confirming the introduction of LVR "speed limits" in August, the Reserve Bank estimated they could result in 1-3 percentage points lower credit growth for the first year they're in place, and 1-4 percentage points lower house price inflation.

ANZ September quarter mortgage book grows 1.6%

Meanwhile, fresh figures out from the country's biggest bank, ANZ New Zealand, show its net residential mortgage lending grew by $880 million, or 1.6%, in the September quarter to $56.681 billion. Of ANZ's quarterly net growth $198 million, or 22.5%, stemmed from high LVR lending. That means the percentage of ANZ's total home loan book by value at high LVRs was 23.76% at September 30, slightly down from 23.78% at June 30.

The latest figures from the other big banks show the percentage of high LVR lending in Westpac's mortgage book was 22.75% at September 30, ASB's was 23.47%, Kiwibank's 18.77%, and BNZ's - at June 30 - the lowest at 15.16%.

The Reserve Bank says the new statistics it issued today are from a survey of banks it implemented earlier this year to collect better quality data on lending by LVR.

"While the survey may be expanded in the future, LVRs broken down by region or by type of borrower are not currently available. Aggregate data from the new bank LVR survey will be published on a monthly basis, from late December, with data for the August-October 2013 period released today."

The Reserve Bank also provided the chart below

Notes to table

The first three columns of the table show banks’ mortgage commitments, which are finalised offers to customers to provide mortgage loans or to increase the loan value of an existing mortgage loan, as evidenced by the loan documents provided to the borrower.

The high LVR share (after exemptions) is calculated by excluding exemptions from LVRs above 80 percent (column 3 minus column 4) and dividing by total new commitments less exemptions (column 1 minus column 4).

The Reserve Bank has prepared a short video called Booms, busts and the way between that explains the role of macro-prudential policy, including LVR speed limits.

(Update adds comments from Michael Gordon, plus ANZ's September quarter figures).

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38 Comments

by Boatman | 28th Nov 13, 12:17pm 1385594276

No matter what we do we will always be up against " Information Assymetry"

I wonder what Wheeler really knows , or expects , that led him to interfere so vigourously and stringently in the only truly free market in NZ ?

I still think it was a big mistake on his part

After all , in the absence of any meaningful new mining , oil drilling , manufacturing or industrial development in NZ , we are left with construction and property development .

This is the only thing that will help us :

Achieve 5% economic growth
Reduce youth unemployment
Stimulate downstream demand
Will be private capital driven rather that fiscally funded .
Catch up with Australia

by rjf | 28th Nov 13, 12:53pm 1385596424

So you are suggesting that allowing first time buyers to mortgage themselves up to their eyeballs with low deposits is the best way to grow our economy?

There are plenty of first time buyers spending half of their income (probably more in many cases) servicing mortgage debt, that's money that could be spent or invested in the wider economy - rather than being shipped off to Australia as bank profits.

Sensible house prices put more money (earned not borrowed) in the average Kiwi's pocket - that's how we should grow the economy.

by Boatman | 29th Nov 13, 1:59pm 1385686754

@RJF you are missing the point completely , this has nothing to do with homebuyers hocking themselves to the hilt .

Wheeler could not care less about first homebuyers , but he is concerned what happens to banks when rates go up behind TAPERING

Wheeler is protecting the Banking system and Bankers from themselves .

There is little evidence of speculative activity at auctions , there are buyers there usually families bidding for a roof over their heads , and some investors who are genrally in for the long haul

The housing market is simply reacting to the availbility of cheap money , and given the fact that the secondhand housing market is the only truly free market in NZ, I believe that CURRENT PRICES FAIRLY REFELCT DEMAND AND SUPPLY.

Wheelers actions are a sign of desperation , because he cannot increase rates in a poor performing economic environment , and he risks driving the Kiwi$ higher and wrecking any export led growth in so doing

by dtcarter | 28th Nov 13, 12:50pm 1385596221

What makes the used house market 'the only true free market in nz', as opposed to say the used car market, or the chocolate muffin market?

by macbet | 28th Nov 13, 2:14pm 1385601263

Don't forget goats

by Happy123 | 28th Nov 13, 4:20pm 1385608806

Or pygmies

by Boatman | 29th Nov 13, 2:02pm 1385686951

Unlike New Zealands Angorra Goat bubble (quite funny actually) the current levels of house prices are driven by real demand for a roof over ones head .

There is little evidence , either anecdotal or emperical , of massive speculation in the housing market

by dtcarter | 29th Nov 13, 2:39pm 1385689155

What makes you so sure there is massive speculation in the chocolate muffin market?

Isn't the divergency in auckland rental prices (up 3%) vs housing (up 15%) evidence of speculative forces in the housing market?

by Keyser Söze | 28th Nov 13, 2:17pm 1385601426

Regardless of what this does to house prices - at least slowing subprime mortgages to people who can't affoard it is a fundamentally good thing.

by Machiavelli | 28th Nov 13, 2:26pm 1385601980

At some stage the LVR policy will have to be removed. What happens then? Surely it will be like opening a flood gate.

by SK | 28th Nov 13, 2:26pm 1385601985

Its been reported on this site I believe, that low deposit lenders are statistically no more or less likely to default on loans that anyone else.

Hence this protects those who dont need protection.

by Zoltuger | 28th Nov 13, 4:18pm 1385608720

It's the banks who need the protection: negative equity

by Happy123 | 28th Nov 13, 4:53pm 1385610835

Interesting. During the post-GFC crash in the US people would stop paying their mortgage before they stopped paying other bills (credit card, cell phone, etc). The theory was that high-LVR ratio lending was responsible for that, why own a house worth 80k, that you owe 100k on, when you can let the bank take that loss. It seems the same didn't happen here, not because we didn't have high LVR lending but because our laws state a person is personally liable for the remainder of the debt after the house is sold.

So have the LVRs really changed anything? Even if we had/have high LVR borrowing we are still personally liable for any left over debt after a mortgagee sale.

by iconoclast | 28th Nov 13, 5:01pm 1385611282

Yeah, if they introduced non-recourse loans in nz, maybe the banks wouldnt be so gung-ho

by Stephen Hulme | 28th Nov 13, 5:10pm 1385611826

Yep, but Fannie and Freddie picked up the tab in the US with their lavish mortgage guarantee schemes - still do, despite government conservatorship status prior to an apparent effort to re-privatise them.

by steven | 28th Nov 13, 6:01pm 1385614875

Yep, its a vote loser though.

regards

by steven | 28th Nov 13, 5:50pm 1385614241

Some US states have no-recourse lending, we have full recourse.

Yes I think we should have it here.

regards

by spottie | 29th Nov 13, 6:41am 1385660485

What about the concept of personal responsibility ?

If you borrow money, and you default, you should pay it back.

I disagree the concept of non-recourse.

by steven | 29th Nov 13, 7:26am 1385663217

Personal responsibility morally isnt removed from this equation with a non-recourse loan it just is legally.

While I tend to agree with you, or certainly did in the past the problem I see is its not a contract of equals. On the one side we have a ordianary joe blog and on the other a professional who's there to score a bonus. So when the banks lend at LVRs that are excessive ie above 80% and do so knowing that there is a real risk of a house price drop (or they should as professionals) then they are in effect shifting that hazard to a) the borrorer and b) the tax payer.

Happy to discuss this as really Im not convinced either way. Pretty sure some US states allow it and some dont, dunno if any data/lessons can be extracted from that.

For instance,

"Non-recourse debt or a non-recourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. Thus, non-recourse debt is typically limited to 50% or 60% loan-to-value ratios,^[1] so that the property itself provides "overcollateralization" of the loan."

"While the borrower is in first loss position, the lender also assumes significant risk, so the lender must underwrite the loan with much more care than in a full recourse loan. This typically requires that the lender have significant domain expertise and financial modeling expertise."

Which a bank should have.

regards

by spottie | 29th Nov 13, 7:52am 1385664763

Yep, some states are full recourse and some not.

The States are certainly not the poster child for banking systems though.

The banks are not " are in effect shifting that hazard to a) the borrorer and b) the tax payer." I believe.

That risk should ALWAYS fall primarily with the borrower.

There is no gun to their head as they sign that mortgage document at a high LVR.

Also, the banks do not generally call in a single mortgage just on a house value drop.

Assuming repayments are still being made.

They do however, with multiple securities held keep ALL the proceeds of a sale (including homowners equity) and use that to reduce the LVR on other properties the owner has.

Non-recourse breeds a dangerous attitude to debt, where the borrower believes he needn't make repayments as he can "just walk away"

This is a bad attitude to encourage, as it will lead to further problems in business dealings.

Also, the hazard is not shifted to the taxpayer.

Under the OBR it is the bank investors who take the initial hit. The Govt guarantee that then clicks in is AFTER this haircut.

by Happy123 | 29th Nov 13, 8:44am 1385667868

Moral hazard... should fall on both parties, the banks/lenders through regulation and the borrower through full recourse. The US had neither and in the end both parties paid for it dearly.

by dtcarter | 29th Nov 13, 8:56am 1385668573

Yes, the banks themselves, when they are on the otherside of the deal, are quite happy to walk away, so why should it be immoral for the common man to walk away from an underwater realestate investment? Morality shouldn't depend on if the bank is wining or losing.

by spottie | 29th Nov 13, 9:06am 1385669199

But the banks do not generally call in a home mortgage solely because it is underwater. (In NZ)

There are almost always other reasons.

by dtcarter | 29th Nov 13, 9:13am 1385669605

Sorry, should have explained myself a bit more. In the US, during the GFC, when the banks (Goldman etc) were acting as investment managers investing in office blocks, and the value of the block became less than the loan they had against it, they walked away and left the lenders holding a loss.

I didn't mean they were calling in home loans and crystalising losses.

by spottie | 29th Nov 13, 9:28am 1385670509

Sure.

But the thread is about the RBNZ, residential LVR restrictions, and NZ banks.

by dtcarter | 29th Nov 13, 9:35am 1385670942

Really? I thought this thread was about the morality of non-recourse loans?

I'm not sure morality comes into it, a loan is a contract, it has terms and it has risks. If a bank is happy to walk away when it's the borrower, why shouldn't the common-person?

Non-recourse loans could lead to a better functioning housing market as banks would take more care in their lending if they have greater exposure to potential loses.

e.g. when house prices are rocketing up 20% year-on-year meaning there is a high likelyhood of a correction, banks would naturally slow their lending, which would take heat out of the market without the regulator needing to intervene.

by Happy123 | 29th Nov 13, 8:48am 1385668109

That would be an interesting stat, which US states had the biggest property price falls and of these how many were non-recourse and vice versa.

by SK | 28th Nov 13, 2:29pm 1385602182

Banks can write their own loans ffs.

Would be far and away better to target loan sharks, chrisco and used car finance and the like - if the goal is to protect the vulnerable.

by rjf | 28th Nov 13, 2:35pm 1385602551

I'm not sure Banks can. Ask Northern Rock.

In a competitive environment they're just chasing profits. This new policy calms the whole market and protects the banks to some extent from the inevitable blood-bath when interest rates climb.

by Simon | 28th Nov 13, 3:24pm 1385605499

have noticed less 'to be auctioned' and more by tender or neg. in auckland.

Take away the rediculous auction room pressures and that will be good enough for a few % price drop alone in the auckland market. I personally think the auction process is unethical. A house is a huge purchase, to force people to make decisions over few seconds is not fair. Competitive tender with plenty of time to think about beating an offer is fine and much more appropriate for such a big value, low volume product.

Looking forward to the reinz price index for Nov.

by Happy123 | 28th Nov 13, 5:00pm 1385611223

It can go both ways. Say you walk into a auction and are happy to pay 600k for a house but the bidding only goes to 550k and you get the house for 50k less than you planned to pay. If that same sale had been done by tender or sealed bids you would have put forward your 600k offer not knowing that you've over-paid.

An auction lets you know where everyone else stands, all cards are on the table. I like buying at auction because I know that I've paid a market rate and that I have a house that is re-sellable.

"A house is a huge purchase, to force people to make decisions over few seconds is not fair."

You should not be making any decisions at the auction.

by dtcarter | 28th Nov 13, 9:59pm 1385629146

"Say you walk into a auction and are happy to pay 600k for a house but the bidding only goes to 550k and you get the house for 50k less than you planned to pay"

But that is very rare indeed. The agents have done their research, and set the reserve above what they think people are prepared to pay. If there are two or more cashed up buyers in love with the property they get a better than average price, if not it gets passed in and sells by negotiation afterwards.

All those stats the agents have saying a 90% success rate selling at auction, if you read the fine print they include the sale of properties by negotiation after failing to sell at auction.

The high reserve price works doubly well for them, as then they only need one interested buyer and the vendor can big against the buyer up to the reserve.

The high reserve works tripple well for them, as the vendor can place a closing bid 50K above the last legitamate bid, then if it doesn't sell on the night, at the next open home they can say, well it got passed in at X, encouraging people to offer X+1, when really the top bid was X-50K.

You never get a bargain at auction.

I agree a benefit of the auction is you know where everyone else stands. But it would be even more transparent if the standard REINZ contract didn't state

"2.5 The vendor reserves the right to bid personally, by a representative, or through the auctioneer and"

by Kate | 28th Nov 13, 10:07pm 1385629654

Yes, that statement that it was passed in at "x" - when "x" was a vendor bid is really misleading in my opinion. It should not be allowed. But how to prevent it? Outlaw vendor bids - they are like ghost bidders, which in TradeMe auctions are clearly not allowed.

by dtcarter | 28th Nov 13, 10:39pm 1385631590

It's not just against the trademe rules, it's against the law. If you place a vendor bid on a car auction the commerce commission prosecutes and you pay a massive fine. But somehow it is allowed for real estate?

by Appreciating Assets | 29th Nov 13, 3:16pm 1385691383

Barfoot and Thompson do not allow vendor bids.

by Happy123 | 29th Nov 13, 8:39am 1385667594

Agree with your point about vendor bids but I would add that they do have to state that a bid is from the vendor (or vendor agent). So if you pay attention to the whole process you'll know where the market stopped bidding.

"You never get a bargain at auction."... That should read, "you never get a bargain in a sellers market". Whether it's auction, offers, tenders, etc you will get a bargain if there is 5 houses for sale and your the only cash buyer.

by dtcarter | 29th Nov 13, 9:02am 1385668941

"they do have to state that a bid is from the vendor (or vendor agent). "

Where in the auction contract does it state that?

Barfoot for instance cross out the terms about vendor bidding and replace it with:

"A licensed real estate agent acting for the vendor in respect of the sale may submit a bid on behalf of any person except the vendor but only if that person is identified to the auctioneer before the commencement of bidding."

The standard auction contract not only allows vendor bidding, but it has no requirement that a vendor bid be identified as such. All those telephone bidders, how do you know they are not the vendor?

by Simon | 29th Nov 13, 9:06am 1385669216

On that logic you could argue legalisation of all drugs, sellable in diarys, and suggest people 'should not be buying them because they are halmful to themselves'...

Just because you might be an investor or clever enough to set yourself a top price and not go over that does not mean everyone is. Having been in auctions and hearing from people who have won, they almost always simply bid to the absolute max the bank was prepared to lend and this is often way over what they originally had planned as there top bid.

Add to the fact of committed money in valuations, builders reporters etc, and no one wants to walk away being outbid, if it happens a few times you're 10-20k in the whole just doing due diligence on houses you never end up buying...

I struggle to find any support for the auctioning of houses other than realestate agents who get an easy sell and good commision and the sellers. Ban them.