Westpac economists say there is no compelling case at the moment for the Reserve Bank to loosen the limits on high loan to value ratio lending

There's no compelling case at the moment for loosening the limits on high loan to value ratio lending, Westpac economists say.

The LVR restrictions, initially put in place by the Reserve Bank in 2013 and strengthened last year with addition of a 40% deposit rule for housing investors, have become something of a political football with the major party leaders suggesting last week that they should be gone.

But in their Weekly Commentary Westpac's NZ economics team say that the case for loosening the LVR limits "is not compelling at this time", especially with the financial stability risks stemming from the housing market still "a dark cloud on the economic horizon".

"While lending restrictions will be eased at some point, their eventual roll back is likely to be gradual and is likely to be preceded by a period of consultation," the economists say.

They say while lending restrictions "are playing a role" in the slowing of the housing market, the more significant factor is the rise in borrowing rates over the past year.

Calls for removal of the LVR limits are, the economists say, premature.

"LVR settings hinge on the degree of risk to the financial system. And at this stage, we’re not really seeing the evidence that risks around highly leveraged borrowing and debt have materially eased."

The economists say increases in both domestic and offshore funding costs have seen mortgage rates creeping higher since August of last year. And while borrowing rates are still at relatively low levels, this has been a significant change in New Zealand’s lending environment after several years when mortgage rates were either flat or falling.

"For prospective owner-occupiers, the rise in borrowing rates is adding to challenges around housing affordability (which is already stretched in some parts of the country). Similarly, for investors and developers, increases in interest rates mean that the financial returns on housing assets are looking a lot less attractive than they have in recent years."

In terms of when the LVR limits might be eased, the Westpac economists say the RBNZ has always said that the imposition of macro-prudential tools, like LVRs, was meant to be a temporary measure to manage the risks to the financial system over the course of the cycle.

"However, the framework for macro-prudential policy decisions is inevitably quite subjective. The RBNZ’s publications have tended to focus more on how the various macro-prudential tools would be applied. There is less guidance in relation to their removal."

They say the best way to determine what happens next with the LVR restrictions is to step back and look at what the RBNZ is trying to achieve with this policy.

"The purpose of macro-prudential policy is not to protect individual borrowers from risky borrowing decisions (a misconception that’s probably not helped by the choice of LVRs, which are applied at the individual loan level). And it’s not a substitute for monetary policy. Instead, the aim of this policy is to ensure the efficiency and soundness of the broader financial system."

The economists therefore say that the case for easing or removing LVR limits rests on:

  • Are LVR limits impeding the functioning of the loan market by more than is necessary?
  • Are LVR limits at risk of creating stress on the financial system?
  • Would there be excessive risk in the financial system if the LVRs were removed?

"On the first question, LVR limits have certainly done a lot to slow the pace of house sales. But it’s less clear that the restrictions are leading to dysfunction in the loan market. One symptom of this would be a rush of home buyers towards non-bank lenders; there has been some pickup in that segment of the market, but it remains a very small share of total lending.

"On the second question, there would be a strong case for easing the restrictions if house prices were falling too rapidly, putting borrowers into negative equity and increasing the likelihood of loan defaults. But the fall in house prices that we’ve seen to date doesn’t meet that description. And going forward we’re expecting prices to flatline, rather than spiral downward.

"On the third question, the risks for the financial system haven’t really dissipated despite the slowdown in the housing market. Household debt is still at a high level relative to household incomes. In addition, house prices remain stretched relative to a range of fundamentals, such as price-to-income ratios."

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6 Comments

thanks for providing both sides of story, rather than just hearing all real estate agent bosses and property investors.

The flow of mortgagee sales onto the Auckland market seems to be very controlled. Banks will know what problems they have on the books. I've also found a curious addition to the typical mortgagee sales where data can be pulled up; a mortgagee sale within 11 months. It's not clear what's happened but someone bought at the peak and apparently has needed to sell urgently then couldn't.

http://www.trademe.co.nz/property/residential-property-for-sale/auction-...

LVR...the banks have proven they can't be trusted when greed is involved.

A sustained price rise was allowed to happen over several years, but a small dip in one year seems to be generating more jitters..
Wonder why ?

It won't be only locals holding back to list there house or drop the price because of hope in a election, elections always make people wait and see, Overseas investors will be watching to, if national gets in a % of people mighted list there house straight away so sales will slowly carry on down to where ever they end, if labour gets in the listings might be higher pushing prices down a bit faster to ever they end, the reason for the market to go down hasn't changed, the wild card is the overseas investors bailing and orderly or maybe even holding, the Chinese government is the one that worries me

It's good to see the LVR restrictions in place particularly for Speculative Investors which has certainly put the breaks on the run away Auckland market that we so needed. I think most would agree that it's far better to let the property market return to more affordable levels rather than have the banks collapse.

Though I am curious to know (Perhaps David could answer this), if the Australian banks have stopped lending to Speculative Investors on their home turf or just stopped lending to Speculative Investors outside of Oz?

If they've only stopped the property investment lending for 'off shore', then that would explain they their market hasn't been as effected as ours has (Mainly Auckland).
We only need to look at the auction results in Oz to see just how terrible and quickly ours auction results have declined.

Australia has had some declines in their auction results on average around -20% but not to the same drastic extent our have.

https://www.domain.com.au/auction-results/

Recent auction clearance rates in Oz:-

Sydney 70%
Melbourne 69%
Adelaide 74%
only Brisbane is showing a 50%