RBNZ to impose tight controls on high LVR lending

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By Leith van Onselen

From Interest.co.nz’s Bernard Hickey today comes news that New Zealand’s central bank and prudential regulator, the Reserve Bank of New Zealand (RBNZ), is about to implement speed limit controls on high loan-to-value (LVR) mortgage lending:

Two banking sources have told me the Reserve Bank advised them informally on Friday that it would set a ‘speed limit’ of 12% for growth of high LVR (loan to value ratio) mortgages and that a public announcement was due within days.

This would mean a maximum of 12% of total new mortgages would allowed to be in the 80% + LVR category, significantly below the 30% share of growth seen over the last year for such low deposit mortgages…

If the speed limit was imposed at 12%, lending growth would slow sharply. If it had been imposed a year ago and banks went right up to the edge of the limit and still lent a total extra NZ$9.2 blllion, then the high LVR lending would have been NZ$1.66 billion lower at NZ$1.1 billion. Bankers said in reality the banks would be reluctant to go too hard up against the 12% limit, given it would be a condition of their banking license, suggesting banks would instead in practice opt for a lower number around 10%.

The sources said an announcement was expected within days and appeared not to have any exemptions for first home buyers…

The banking sources said banks would struggle to deal with such a short time frame, given there were large backlogs of pre-approved high LVR mortgages.

If true, this is a stunning development and would place the RBNZ at odds with both the National Government and the Labour Opposition, who have both lobbied hard to have first time buyers excluded from any LVR speed limits.

Such measures should also work to take some heat out of the red hot New Zealand housing market (particularly Auckland and Christchurch), and buy some time for the Government to fix the fundamental supply-side barriers that are preventing affordable land/housing from being developed.

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Leith van Onselen

Comments

  1. I am generally opposed to Nanny Statism, but this is a temporary necessary measure to stem the damage that is resulting from severe regulatory distortions to housing markets, and really IS “for the good” of the people who would otherwise be fodder for decades of mortgage slavery.

    They won’t regret, once affordability has been restored, that they were forced to hold off.

    • But Phil it doesn’t solve the underlying issue. One limits those who can purchase by price (possibly servicing capacity)and the other limits the number who can purchase by deposit size.

      NZ will still have a housing shortage in Auckland, and that is the issue.

      Still good luck to them, it will hide the problem for a while.

      • Absolutely agree the issue is supply of houses.

        This is what determines the proportions of people will get to buy and that misses out.

        The availability of credit determines the amount of debt taken on by those who do get to buy.

        The tighter the credit the better. Only the finance sector and the property rentier class benefit from a combination of undersupply and high credit availability for first home buyers.

        The property rentier class will benefit anyway even if credit is very tight, because the prices will rise as young people save money, to keep pricing out the proportion that has to miss out. They possibly just do not benefit as much.

        When supply is elastic, almost nothing penalises first home buyers. Saving up most of the purchase price of a first home is not impossibly onerous if credit is really tough. But easy credit does not make the prices inflate either, so the consequence is either buying a far better house; or having a lot more discretionary income; or paying the mortgage off far sooner and then having spare money to invest. Economies with these conditions will absolutely bury the rest of the world economically over the next few decades.

        The only downside of easy credit in these conditions is the occasional default from people who should not have bought a home at all, or should have aimed a bit lower. But this damage is negligible compared to the systemic ruination of the economy and society by strangled housing supply.

  2. It could be a case of less local competition for foreign cash buyers, if anecdotes are accurate.

  3. Investors with a bit a cash rejoice, less competition from fhb which share of buyers will drop to pretty much zero with this new rule.

    No alternative to supply

    • Yes that is what I fear. Some well conected FHB’s will still get finance though.

      It’s back to houses for the sons of wealthy or politically active in NZ.

      Were you once TRB?

      • Given the parenthood of ‘our’ banks do we really think this is only about New Zealand? More like, finally, a trial run for what might apply in the Land of Head Office. If it goes smoothly in Auckland, expect it in Sydney and Melbourne….And let’s remember that the price of anything, no matter what it is, is determined by the ability of the buyer to pay….

      • Janet
        Technically it s not determined by the buyer but the losing bid ( just before the winning bid)

        Price constraint will not do much to encourage building and there goes a bit of the supply. Good for investor

      • Dam. It doesn’t matter if there is just 1 house for sale and 1000 people want to buy it, if no one has the resources to pay the asking price, it won’t sell – until the price falls to the level that the first buyer ( your winning bid) can pay. Unless a buyer has the ability to settle a transaction, nothing will transact. Take debt away from most people and they won’t be buying much of anything, as they become one of the thousand….and in a market the size of any national property market, it is the thousand that set the median price level.

    • flyingfoxMEMBER

      I fear this as well. Anyone without a deposit will get pushed out of the market. From debt into renting. However I am unsure what exactly this will do to house prices. Might still cause price to fall but I suspect rents will rise.

      • Anyone without a deposit probably should be pushed out of the market. I’m not sure there’s really much to ‘fear’ here.

      • bskerr2MEMBER

        Something will break, as more people have less access to property and are forced to rent social instability will occur if it isn’t already. Sooner or later the system has to break.

        I believe that anyone who does not own property, be it a renter, someone wanting to buy or just someone working that is not sure should take all their deposits out of ANZ to crash it both in NZ and Australia. This may cause a real issue for future funding and as far as I know ANZ is the most exposed in the Melbourne market.

        Also, if you think the government is going to do anything about afford ability forget it. If you think you are in a democracy you are dreaming. Currently as a recent news article says the most important topic to many is housing affordability but it does not get a mention from either party coming up to elections. Why is that you wonder, well when you have the PM who has a property port folio worth 20 million dollars do you think he is going to want to see his investments go down. The guy is living of the backs of the poor in Australia as many of them are.

        We need to work together as a group and take out one of the major banks, or at least deplete it’s funds. ANZ is a good target for that. This may destabilize the markets.

    • Offshore interests can buy whatever they like under $10m, as I understand it. After that it is supposed to go the the FIRB (the Overseas Investment Office)