RBNZ targets high LVR lending

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ScreenHunter_01 Jan. 29 08.11

By Leith van Onselen

Following last week’s Memorandum of Understanding between the Reserve Bank of New Zealand (RBNZ) and the New Zealand Government, the RBNZ has today outlined how it will use macro-prudential policy tools to target high loan-to-value (LVR) mortgage lending – i.e. mortgages where the deposit or equity in the property is less than 20%. From Interest.co.nz:

The Reserve Bank is getting banks to break down their high loan-to-value (LVR) housing lending by borrower type as it outlines a preference for “speed limits” and “tiered limits” – as opposed to outright caps – in the LVR restriction tool included in its newly minted macro-prudential toolbox…

The Reserve Bank has now issued a response to submissions on its macro-prudential policy consultation paper and another paper outlining its final policy position. The latter confirms a Reserve Bank preference for a watered down version of caps on residential mortgages with high LVRs…

The power to restrict high LVR lending by banks is one of the four new Reserve Bank tools. The country’s big five banks have between 15% (BNZ) and 24% (ANZ and Westpac) of their residential mortgages by value at high LVRs.

However, the volume of high LVR residential mortgage lending has been increasing, highlighted by $1.4 billion, or 84%, of ASB’s $1.7 billion growth over the past two quarters coming in lending where the borrower has deposit/equity worth less than 20% of the loan…

The Reserve Bank says it’s getting a break-down of high-LVR housing lending from the banks by borrower type that it can use to help assess the pattern of high risk lending in the housing sector, and the regulatory impact of any high-LVR lending restrictions.

…it says quantitative restrictions would typically take the form of “speed limits” restricting the share of new high LVR lending that banks can do, rather than outright limits. They could also take the form of outright limits on the proportion of the value of the residential property that can be borrowed.

“For example, zero new residential property lending permitted with an LVR above 90%. This can also be thought of as a speed limit of zero,” the Reserve Bank says.

“A ‘speed limit’ would limit the share of new high-LVR lending to the residential property sector that can be undertaken above a given LVR threshold. For example, only 10% of new residential property lending might be permitted with an LVR above 90%.”

“Tiered limits” may also be used…

The Reserve Bank says speed limits would let banks continue to provide some high-LVR loans to “credit worthy borrowers” such as individuals with low net worth but strong current or future debt servicing capacity. This speed limit option was “broadly preferred” in banks’ submissions.

“Speed limits would also reduce the incentives for disintermediation and avoidance, since banks would still be able to undertake some high LVR lending,” the Reserve Bank says. “On balance, we believe the use of the ‘speed limit’ approach rather than outright caps on high-LVR lending would help to mitigate these costs by enabling banks to continue to undertake some high LVR lending to credit worthy borrowers.”

While acknowledging the efficacy of using macro-prudential tools to dampen the credit cycle and improve overall financial stability, the RBNZ concedes that they do not represent a ‘silver bullet’ and that fundamental reforms to land supply and planning constraints are key to improving housing affordability and mitigating booms and busts in house prices:

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“Freeing up land for subdivisions, reducing the time and cost of housing developments and improving productivity in the building sector are likely to be key in reducing house price pressures emanating from excess demand for housing. However, in the interim, macro-prudential policy may offer scope to make the financial system more resilient and help mitigate excesses in credit and asset price cycles that may flow from such imbalances”.

Now that the RBNZ is up and running with macro-prudential measures, hopefully it won’t be too long before the RBA/APRA follows suit.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.