Reserve Bank says financial risks have lessened but will not be loosening LVR restrictions at this stage; will wait till November 'at least' before any loosening

The Reserve Bank says financial risks have lessened - but it's ruling out further relaxation of bank mortgage lending limits at this stage and is indicating it will wait till "at least" November.

The central bank did loosen the lending limits from January 1 this year.

In delivering his first Financial Stability Report, RBNZ Governor Adrian Orr said said both lending and house price growth had slowed in the past 12 months – in part due to the RBNZ's imposition of loan-to-value (LVR) ratio restrictions.

"This more subdued lending growth needs to be further sustained before we gain sufficient confidence to again ease the LVR restrictions," he said.

Asked at the later media conference when the RBNZ may look at further relaxation of the limits, Orr said the bank would wait "at least" till the next FSR is released in November this year.

Talking more broadly, Orr said the dairy farming sector remains highly indebted.

"Most dairy farms are currently cash-flow positive, but remain vulnerable to any possible downturn in dairy prices and agriculture shocks. Reducing this bank lending concentration risk requires more prudent lending practices."

On the subject of LVRs, the RBNZ said that while house price growth has moderated, the level of house prices remains high relative to household incomes.

"Slowing credit growth and house price inflation have eased risks related to household debt in the past 12 months. Reflecting this, the Reserve Bank announced a small easing of the LVR policy in November 2017 to allow a higher proportion of loans to be made at high LVRs.

"The full effect of this easing is still working through, and no further change in policy settings is deemed appropriate for now. The policy will be eased further in the future if housing market risks decline and banks’ lending standards for new mortgage loans are prudent." 

The RBNZ said the growth rates of household debt and house prices have been fairly stable over the past six months.

"Combined with tighter bank lending standards, this suggests the financial system’s vulnerability to household debt has not changed materially since the previous [Financial Stability] Report.

"Ultimately, continued stabilisation, or a further reduction, in the growth rates of household debt and house prices, will be required before the risk to the financial system is normalised.

"Bank lending standards will have an influence over both. Currently, banks expect to keep their lending standards relatively tight for the rest of 2018." 

Referencing the recent bombshell revelations around banking and financial advice practices in Australia, Orr said the conduct and culture of banks and insurance companies was "an ongoing driver" of financial soundness. 

"These features are being jointly reviewed by the Financial Markets Authority and ourselves, and we will report our findings over coming months."

As expected, Orr put in a plug for the new Bank Financial Strength Dashboard, launched on Tuesday, which is aimed to make it easier for financial information to be compared, such as bank capital buffers, non-performing loans, and risk concentration.

"Our aim is to improve the public’s understanding of their banks, and hence the incentives for banks to operate soundly," Orr said.

He said the banking sector was broadly efficient, "although some lending allocation remains a vulnerability".

"The major New Zealand banks are in the top quartile of OECD banks for their return on assets. Bank services are also wide ranging and of reasonable cost. These outcomes are possible due in part to the low cost-to-income ratios of our major banks, and the current low level of impaired loans."

This is the media statement released by the RBNZ on Wednesday:

Tena koutou katoa, welcome all.

New Zealand’s financial system remains sound. The banking system holds sufficient capital and liquidity buffers, guided by our prudential regulatory requirements. These buffers reduce New Zealand banks’ exposure to adverse shocks.

An ongoing driver of financial soundness is the conduct and culture of banks and insurance companies. These features are being jointly reviewed by the Financial Markets Authority and ourselves, and we will report our findings over coming months.

The financial system vulnerabilities are much the same as we discussed in our previous Financial Stability Report. Household mortgage debt remains high. However, financial risk has lessened with both lending and house price growth slowing in the last 12 months – in part due to our imposition of loan-to-value (LVR) ratio restrictions. This more subdued lending growth needs to be further sustained before we gain sufficient confidence to again ease the LVR restrictions.

In a similar vein, the dairy farming sector remains highly indebted. Most dairy farms are currently cash-flow positive, but remain vulnerable to any possible downturn in dairy prices and agriculture shocks. Reducing this bank lending concentration risk requires more prudent lending practices.

The high dairy-farm indebtedness, and the fact that LVRs were necessary, reflects that banks’ allocative efficiency – eg deciding how much to lend to whom – can be impaired due to the pursuit of short-term, rather than longer-term, profits.

We have launched the Bank Financial Strength Dashboard to make it easier for financial information to be compared, such as bank capital buffers, non-performing loans, and risk concentration. Our aim is to improve the public’s understanding of their banks, and hence the incentives for banks to operate soundly.

The banking sector is broadly efficient, although some lending allocation remains a vulnerability. The major New Zealand banks are in the top quartile of OECD banks for their return on assets. Bank services are also wide ranging and of reasonable cost. These outcomes are possible due in part to the low cost-to-income ratios of our major banks, and the current low level of impaired loans.

The insurance sector as a whole also remains sound, profitable and adequately capitalised, once again guided in part by our prudential regulatory requirements. However, some insurers have relatively small capital buffers necessary to meet future events. We are discussing this directly with the insurers.

We have sought a court order to put one New Zealand licensed insurance company – CBL Insurance Ltd – into interim liquidation in recent months. There will be a full liquidation hearing in the High Court.

There are also challenges to efficiency in the insurance sector. Market share remains concentrated. Life insurance commissions are particularly high, which inevitably flows through into higher premiums. We believe technology developments will be a key driver of competition in the future.

Nga mihi, thanks.

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18 Comments

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Jim Grant
"My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates.
We put the cart of asset prices before the horse of enterprise.
We entertained the fantasy that high asset prices made for prosperity, rather than the other way around.
We actually worked to foster inflation, which we called 'price stability' (this was on the eve of the hyperinflation of 2017).

We seem to have miscalculated."

It's the Jimmy Grants of NZ propping up asset prices. 68,000 Jimmy Grants each year..

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"Reducing this bank lending concentration risk requires more prudent lending practices." A very telling statement indeed.....

Something tells me eyes have been on Aus and the disaster thats seemingly going to unfold over there and has got some knees knocking

From Friday, the 10s are more than 16 bps lower in yield. That’s not uncertainty, it’s a collateral call (fear).
What is truly telling is just how quickly everything changed. That’s not Italy, that’s the fragility of this whole narrative from inflation hysteria to this boom that never was. There is no better example of it right now than Germany’s debt markets.
Far more than UST’s, German bunds, schaetzes, and bobl’s have erased almost a year and a half of “reflation” in only two weeks. Poof, like that it’s gone.

http://www.alhambrapartners.com/2018/05/29/such-fragility-not-italy/

In a February speech in New York, ECB governor Benoît Coeuré observed that world central banks may hold as much as 90% of all German bunds. The March 23 edition of Grant’s paraphrased Coeuré’s remarks in speaking on behalf of the central bankers who have effectively snuffed out price discovery in German government debt:

We have done our work; private investors are defeated; they can do no damage to the yields that we have chosen to impose.

https://www.grantspub.com/almostDailyHTML.cfm?dcid=241&email=annzer@gmai...

In retrospect did the LVR tool ever really work as intended? They seemed to do little to cap the house price, by some measures it actually set up a demographic issue access to credit for first time buyers was constrained yet many middle age buyers jumped in on investment properties. It looks like a bit of a mess to me now and I would urge RBNZ to extricate itself from this macroeconomic tool, it was only ever designed to be a short-term measure.

From the Financial Stability Report;

The LVR policy has been successful. It has reduced the concentration of lending at high LVRs, and has reduced the share of lending to investors. However, some households still have very high levels of debt, and mortgage lending standards remain relaxed on some metrics, despite the broader tightening in bank lending standards.

And;

In recent years, a substantial and increasing share of high-LVR loans has gone to first-home buyers and the share of total new commitments going to first-home buyers has grown steadily. Overall, this implies that the LVR policy can mitigate stretch in household balance sheets without greatly impeding home ownership.

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Thanks to National Governemnt for turning entire NewZealand housing market into a Casino for foreigners to play.

Labour was suppose to put a full stop but.......................Politicans.........Vested interest................once in power

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I do not think ban on foreign buyer is the only solution but yes it is a Major Step in the right direction.

In a street if one foreign buyer comes and pay say a million dollar to a 800000 house - it becomes a new benchmark and it is only people from overseas who are looking for safe place to park their money do so as they do not mind loosing 20% or even 30% as long as their risky unaccounted money becomes official.

This is money Laundering.

Before power when in opposition, Labour government was able to see and understand the reality of what was happening on the ground but Power corrupts and now see how they are trying to delay and dilute as they can not stop it completely from coming - Ban on foreign buyer.

Real shame to Labour supporters who voted them.

Foreign buyer band is in the select committee process, isn't it?

Correct which is used to delay and reduce the impact by diluting the proposal and giving window of opportunities to all foreign buyers and speculators.

Can check with any real estat agent, how they are playing on fear and rush of foreign buyer to buy before the policy is put in place. Even now what ever support market is having is from those foreign buyer (though smaller in number as before as are not able to ship money out of their country as easily as were able to do earlier) besides FHB.

Select committees are a normal part of any law being made - not something you can avoid unless as the last government developed a penchant for, you force almost anything and everything through under urgency.

Correct and understand but why keep on extending the deadline. Should be done within the time frame. In this scenario estate agents are exploiting the fear (Fairly so as are in business) and is working.

If government is serious, it should be done with a time limit. As committees are good but can also be used to delay and dilute the provision - not only in NZ but world over.

1. V in LVR is inflated when any property in the same neighbourhood makes a capital gain.
2. L is increased somewhat proportional to V (especially with no DTIs, the govt deliberately propping up house prices)
3. go to line 1

The current LVR slows this down a little but I'm sure transaction costs from real estate agents and lawyers is helping just as much. Throw a 3% stamp duty on and see how many houses are bought and sold (thus lending money into existence).

Im ok with LVRs staying in place but it needs the Overseas Investment Amendment legislation to hurry up https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/docum...

Interestingly reading some of the submissions from people with Chinese names who also claim to be recent arrivals from China, they all want this legislation in place pronto to stop overseas speculation wrecking NZ.

In case you missed it, the RBNZ also sees house growth inflation to get back to normal within 2-3% pa for the next few years ...

How much more predictions do FHBs want ?

Auckland houses will be at least 10% dearer in 2020/2021.

Smart buying time is now.

I did miss it, yes... please paste in quote.

Was that this bit....

" The simultaneous rise
in household debt and house prices could partly reflect a self-reinforcing
cycle, where bank lending has boosted house prices and, in turn, higher
house prices have supported more bank lending, by increasing the value
of homeowners’ collateral. But this cycle can also operate in reverse,
driving down bank lending and house prices."

or this bit

"Ultimately, continued stabilisation, or a further reduction, in the growth
rates of household debt and house prices, will be required before the risk
to the financial system is normalised."

They also made zero comments on Auckland house prices being "at least 10% dearer in 2020/2021". Source?