Westpac economists believe weaker conditions in the housing market - they expect zero price growth for 2018 - will allow the Reserve Bank to implement further easing of the loan to value ratio (LVR) restrictions before the end of this year.
In releasing its latest Financial Stability Report (FSR) last week the RBNZ indicated it would not consider any further easing in the LVR restrictions till "at least" release of the next FSR in November.
The LVR rules were relaxed from January 1 this year.
In their NZ Weekly Commentary, the Westpac economists say the RBNZ had previously indicated that it would ease the restrictions further if it was satisfied that house price and credit growth had slowed to around the rate of household income growth, and that there was a low risk of the housing market taking off again.
"It’s a close call as to whether those conditions have been met. House prices are up 3.8% in the last year, while credit growth is running at 5.7%yr. Comparable figures for household income growth aren’t yet available, but last year it was running just above 5%," the economists said.
They said the RBNZ appeared "more conservative than before" on the prospect of an easing, highlighting concerns about the high level of household debt (rather than just the rate of growth).
"The RBNZ was also notably less specific about the conditions for easing, noting that: 'The rules will be eased in the future if housing market risks decline and banks maintain prudent mortgage lending standards'," the economists said.
They said, however, that despite "the imprecision" of these criteria, "we still think that the conditions for an easing of the LVR restrictions will be met before the end of this year".
The economists pointed to the series of new policies being introduced by the Government aimed at cooling investor demand for housing. One of these is already in play, with the extension of the ‘bright line’ test for taxation of capital gains having come into effect at the end of March. Later this year a ban on foreign purchases of residential property will come into force, and the Government has signalled that the use of negative gearing by property investors will start to be phased out from next year.
"Together, we think that these policies will have a significant impact on housing demand over the coming years.
"We expect annual house price growth to slow to zero by the end of this year, in contrast to the RBNZ’s assumption of low but positive house price growth.
"The April house price and sales figures already showed some signs of softening, and we expect that the accumulated evidence over the next six months will satisfy the RBNZ’s concerns."
The economists said, however, that they don't expect the LVR restrictions to be removed altogether.
"The RBNZ, under successive Governors, has made it clear that lending restrictions are likely to be part of the landscape.
"Instead, the RBNZ will look to move from the current ‘tight’ settings to something closer to neutral. ‘Neutral’ in this instance is hard to define, but it implies a set of lending restrictions that are not particularly binding at the time, but would guard against a future loosening of bank lending standards."
The economists said the consequences of the LVR restrictions extended beyond the stability of the financial sector.
"Housing makes up a significant part of household wealth in New Zealand, and consumer spending tends to wax and wane in line with house price inflation. The cooling in the housing market over the last year and a half has also seen a slowdown in the rate of growth in consumer spending, and we expect both house prices and spending to remain subdued in the coming years."