LVR loosening on Friday?

Property

Westpac economists speculate that the RBNZ might be set to announce a higher loan-to-value lendiing 'speed limit' very soon

7th May 14, 2:32pm by David Hargreaves

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

The Reserve Bank might be set to announce a loosening of the 'speed limit' on high loan-to-value lending as soon as this Friday, according to Westpac economists.

Westpac senior economist Anne Boniface noted in a market release today that RBNZ Deputy Governor Grant Spencer was due to make a speech at 8.30am this Friday on housing.

"Given both the topic and timing of this speech, and the RBNZ’s recent tendency to use speeches for policy announcements, we think Friday’s speech could provide an opportunity for the RBNZ to recalibrate the speed limit on high LVR lending," she said.

Boniface said that data released last week showed that high LVR residential mortgage lending had fallen to just 4.8% in March (well below the 15% threshold the bank intended).

"This could cause the RBNZ to loosen up but not remove the restrictions entirely, in order to get lending to first home buyers closer to the desired level.

"Friday’s speech by Deputy Governor Spencer could provide such an opportunity, with next week’s Financial Stability Report used to provide more detailed analysis," she said.

Prior to knowing about Spencer's upcoming speech Westpac economists had previously speculated that the RBNZ might announce changes to the LVR speed limit in the Financial Stability Report, which comes out on May 14, the day before the Budget. Interest.co.nz has published similar speculation.

The imposition of the LVR limits, which applied from October 1, was actually announced in a speech - though this one by the Governor Graeme Wheeler - on August 20 last year.

The limit was set at 10%. This meant that banks could not commit any more than 10% of their new mortgages to loans in excess of 80% of the value of the property.

But while the limit was per se 10%, there were certain categories of mortgage that were exempt. The RBNZ had expected that the overall limit would therefore work out to around 15%.

In the event the RBNZ has admitted surprise at how low the proportion of high-LVR lending has fallen and a speech delivered in Hong Kong by Spencer in March stressed that the LVR limits were temporary and appeared to be laying the groundwork for the relaxing and eventual removal of them.

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23 Comments

by Keyser Söze | 7th May 14, 4:05pm 1399435538

It would be hugely disappointing if the RBNZ committed to loosening LVR restrictions right as they start to have the desired effect of slowing house price growth. It would be like a doctor withdrawing antibiotics at the first sign the fever started to cool. What do doctors actually do in practice - they make you down the bottle well after you think you've kicked the illness and that's what the RBNZ should be doing here.

I think the LVR is useful and extremely important to maintain for the following reasons:

House prices are very expensive and overvalued. A house price correction would most likely whipe out all high LVR equity. Not only is this a moral issue, but the impact on consumer psychology of having seen the value of their single largest asset evaporate is pretty severe, and would flow through to all their consumer activity and ultimately the economy (not to mention the banks).
It slows demand without having to raise interest rates. We have massive amounts of household debt and inflation is no where to be seen. LVR's are a bit of a scalpel to address this issue whereas interest rates are a dirty sword. Higher interest rates just lead to a strange situation where we have a higher currency which lowers imported inflation.

None the less the residential market has gone over the peak. If the RBNZ does pull the LVR and cools interest rates from June it's because they are trying to limit the scale of the correction.

by dtcarter | 8th May 14, 10:34am 1399502081

Many central auckland suburbs peaked in Novemeber, right as the LVRs kicked in.

https://www.qv.co.nz/suburb/area-profile/sandringham-auckland/1464

by Boatman | 8th May 14, 11:46am 1399506386

I disagree , the LTVR rules were a dumb idea in the first place , its nothing more than a destructive interferance in a normal functioning free market , leading to unintended consequences .

There is a ceiling price and a clearing price for everything on the planet , and all that happened was the houses in Auckland went to the ceiling. New supply will bring it all down to the floor again

by fat pat | 7th May 14, 4:38pm 1399437519

Yes the RBNZ gives the all clear – The world is now a safe place to borrow and invest.

No sovereign debt problems anymore

No bond or derivatives or asset bubbles to be seen

No problems with peak oil, phosphorus, water etc.

No prospect of war on the horizon

No slowdown in china

Finally I can lever up and buy a few houses!

by Zombie ponzi | 7th May 14, 11:15pm 1399461318

You have got to be joking.

The whole point of the LVR rules is to ensure banks DO NOT lend too much money relative to the deposits/capital they have.

The more capital a bank holds against its loans, the less risk the bank will be insolvent if and when some of its loans default.

by MortgageBelt | 8th May 14, 8:24am 1399494279

Borrowing has been slowing for some time now.

http://www.interest.co.nz/property/68284/household-borrowing-grows-slowest-rate-five-months

Banks need to grow their lending book - therefore cannot price themselves off the market. That is the constraint they are under. The OCR has had very little effect on their funding costs.

In order to increase lending - the cost of money will need to decrease.

by Grant A | 8th May 14, 2:02pm 1399514537

No control Kimy ? I think you'll find that they have figured out that if they don't pay up for deposits they get bugger all funds. With the RBNZ rules around priority local deposits, they'll take as many domestic deposits as they can get, and thereby reduce what they have to go offshore for. Offshore funding is directly initiated by the banks, and no doubt will only fund what they think they can lend.

by Alter Ego | 7th May 14, 5:25pm 1399440343

Yep a real safe place...except for one small problem you overlooked....Fat Pat.

Read on...spot the clue.

Shhhsh, don't tell anyone.!?...

http://www.stuff.co.nz/national/10019150/Christchurch-in-financial-stri…

I will give you another clue, it is the overheads that have ballooned, been inflated beyond all measures.

by fat pat | 8th May 14, 12:41am 1399466469

Indeed, thanks. I forgot about he demographic problem wiht the baby boomers too....

by BigDaddy | 7th May 14, 11:17pm 1399461428

The LVR idea was a completely dopey notion in that it hit the wrong market, the wrong people and skewed vital statistics.

First home buyers should be exempt from any type of LVR whether it be for new or existing homes.

How are first home buyers supposed to get on the property ladder if they have to pay rent and save $100K or more at the same time?

Not everyone has a rich Mummy and Daddy to fall back on.

Now that interest rates are on the rise (another collosal blunder) FHBs will be even worse off.

To encourage savers, it would have been better if the first $5,000 ( or whatever) income from any savings would attract a lower tax rate, but that idea might be too complictated for the dodos who dream up useless regulations.

by fat pat | 8th May 14, 12:37am 1399466273

The point was to prevent a slew of mortgage defaults arising from a 10-20% housing slump. A worthy objective when you look at places like Ireland. Because if the slump did happen it would be a disaster and would result in OBR bail-in's or more likely tax payer bailouts. Exempting FHB is not a good idea, enough moral hazard with the "welcome home" grant. Rather help FHB's by blocking foreign investors or at least apply a hefty stamp duty while making home ownership more favorable, perhaps through a fat tax incentive. Those actions might have stabilized the housing market, 3 years ago. Its almost too late though, Auckland has been hosed with foreign capital while provincial NZ atrophies. Banks have covered their asses with covered bonds and the risk is greater than ever. I agree though, sucks for FHB's like me who have been left out in the cold.

by spottie | 8th May 14, 7:23am 1399490620

Olly was so very wrong when he came out with reasons why LVR restictions wouldn't work.

So BD.....you now want the RBNZ to be setting tax policy rules.

What a quaint notion.

by steven | 8th May 14, 7:42am 1399491771

No the LVR hit exactly where it was meant to hit, the FHB. The LVR is specifically designed exactly to do that.

The FHB illogical and emotional wants is moot compared to the stability of the financial system. ie Ever increasing debt levels and longer terms are insane, you cant go on for ever....I mean when you get to 100%LVR and 40 years, whats next? 50 years? its plain nuts.

In terms of tax exempt savings, on small amounts the UK has done it for 30 years or more. It would also be difficult to police, and open to abuse, so no KISS, Keep It Simple and Stupid.

Look on the bright side as a investor and not a speculator you should be able to buy cheaper....

regards

by dtcarter | 8th May 14, 10:45am 1399502704

How is tax exempt savings difficult to enforce. To open one the bank requires your national insurance number, here we would use IRD no. To offer the product the bank has to agree to report all savings to the IRD. You are only allowed to contribute to one bank in any given tax year, this means for most people the banks enforce the maximum contribution limit. At the end of the tax year IRD sum up contributions by IRD number, this catches the small number of that over contributed by opening accounts with multiple banks (which is only possible by fraud, falifying the account opening has avoided the limits by falsifying their account opening request, saying they didn't already have an account for the current tax year with antoher bank).

It's obviously more complicated than not offering the product, but fairly simple really, it just requires an end of year feed to teh IRD alongside the current feed of interest payment details, and an end of year sum by IRD number.

by economist | 8th May 14, 10:59am 1399503593

Or even easier, they could just exempt tax on savings all together, after all you have already paid tax on the money to save it in the first place...

by dtcarter | 8th May 14, 1:54pm 1399514098

Yes you have already paid tax on your saving, so you don't pay any futher tax on your savings, you only pay tax on the interest earnt from that savings.

by economist | 8th May 14, 3:43pm 1399520609

What interest on saving?

Take out real inflation (to keep your capital constant value) and then take out the tax and nothings left dt.

By the time they supress interest rates to subsidise the borrowers you've got to be stupid to save, like what's the point? Well I know what the point is - to get your 20% deposit that's why...

by MortgageBelt | 8th May 14, 8:27am 1399494428

Banks need to lend more.

If they don't lend enough they go out of business.

That is why they are lobbying the RBNZ hard to free up the lending market again.

by spottie | 8th May 14, 8:53am 1399496013

They may well need to lend more if they wish to keep setting record profits every quarter.

But that is not the same as "going out of business" as your hyperbole suggests.

Loan volume is only a part of the equation.

The banks, if they are forced to, are well able to manage these LVR restictions I believe.

by steven | 8th May 14, 10:37am 1399502238

Um infinite? and indefinately? always growing?

What part of that cant you see will eventually cause them to go out of business? If the paradgym we live in is locked into growth as an imperitive then at some stage when that growth stops it has to collapse.

regards

by economist | 8th May 14, 9:37am 1399498678

If they are going to change the LVR rules it should be to outright ban LVRs above 90%.

Why should savers stand as guarantors for the banks loans?

by steven | 8th May 14, 10:33am 1399501983

While I agree 100%,

Why should the saved have risk free investments?

That guarantee is also limited to the amount on deposit...the rest is covered by a 3rd party, and tax payer . Why should tax payers who gain nothing have to be the final guarantor?

regards

by economist | 8th May 14, 10:55am 1399503309

...Well steven, I guess for the same reason that if you drop your car off to get a WOF/service or something and return in the afternoon later to pick it up, you shouldn't have to find out that the the mechanic has sold it as he was insolvent and had debts to pay.

Many savers are not investing at all, nor is it their intention. They just are getting there salary paid.

Technically its the savers not the tax payers on the hook, as per the new RBNZ policy on what to do if (when?) a bank fails... but anyway, in the case of a systemanic bank collapse the tax payers very much have much to gain by it not collapsing.