RBNZ launches limits on high risk mortgages

ScreenHunter_08 Jul. 01 09.14

By Leith van Onselen

Just in, the Reserve Bank of New Zealand (RBNZ) has officially launched speed limits on high loan-to-value ratio (LVR) mortgage lending, effective from 1 October 2013. From the RBNZ website:

Reserve Bank Governor Graeme Wheeler today announced that from 1 October banks will be subject to restrictions on high loan-to-value ratio (LVR) housing mortgage loans.

Banks will be required to restrict new residential mortgage lending at LVRs of over 80 percent to no more than 10 percent of the dollar value of their new housing lending flows.

In a speech today at Otago University, Mr Wheeler said: “Housing plays a critical role in our economy. It represents almost three quarters of household assets, and mortgage credit accounts for over half of banking system lending. Housing is a major source of value and of risk to the household sector and the banking system.

“The Reserve Bank is concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy. Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future. This is particularly the case in a market that is already widely considered to be over-valued.

“House prices are high by international standards when compared to household disposable income and rents. Household debt, at 145 percent of household income, is also high and, despite dipping during the recession, the percentage is rising again. Furthermore, the growth in house prices is occurring after only a small correction following the house price boom of 2003-2007 that saw New Zealand house prices increase more rapidly than in any other OECD country.

“The Reserve Bank is not alone in expressing these concerns. Over the past several months the IMF, OECD, and the three major international rating agencies have pointed to the economic and financial stability risks associated with New Zealand’s inflated housing market.

“The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.

“The conventional mechanism to help restrain housing demand, while working on the supply response, would be to raise the Official Cash Rate (OCR), which would feed through directly into higher mortgage rates.

“However, while higher policy rates may well be needed next year, as expanding domestic demand starts to generate overall inflation pressures, this is not the case at present. CPI inflation currently remains below our 1 to 3 percent inflation target. Furthermore, with policy rates remaining very low in the major economies, and falling in Australia, any OCR increases in the near term would risk causing the New Zealand dollar to appreciate sharply, putting further pressure on New Zealand’s export and import competing industries.

“In the current situation, where escalating house prices are presenting a threat to financial stability but not yet to general inflation, macro-prudential policy offers the most appropriate response,” Mr Wheeler said.

“The Reserve Bank considers that LVR speed limits will be more effective than other macro-prudential tools in constraining private sector credit growth in the housing sector, and dampening housing demand. Other macro-prudential instruments, such as counter-cyclical capital buffers and capital overlays on sectoral capital requirements, are likely to have less effect on the demand for housing-related credit and on house price growth.

“We are concerned to ensure that specially designed lending products are not developed with the purpose of avoiding or undermining the LVR restrictions. The Reserve Bank expects bank senior management and bank boards to respect the spirit and intent of the LVR restrictions and to closely monitor the level of high LVR lending.

“How long LVR restrictions may remain in place depends on the effectiveness of the measures in restraining the growth in housing lending and house price inflation. LVR limits will be removed if there is evidence of a better balance in the housing market and we are confident that their removal would not lead to a resurgence of housing credit and demand,” Mr Wheeler said.

“It is critical that priority be given to implementing measures needed to relieve the shortage of housing and land supply, which is the dominant cause of the increase in house prices in Auckland and Christchurch. But the LVR restrictions have a useful role to play alongside the supply measures.”

Bravo RBNZ for articulating the risks posed by the housing market and taking remedial action, even if it is after the horse has already bolted. One can only hope that the Reserve Bank of Australia and APRA follows suit, rather than continuing to bury their collective heads in the sand.

That said, as noted by the RBNZ above, while the LVR limits will likely moderate price pressures, they are no substitute to addressing the structural supply-side factors that are preventing affordable homes from being built and pricing many Kiwis out of the market. The supply-side remains the key to affordable housing in New Zealand and mitigating price inflation (along with changes to tax policies like negative gearing), not policies that tweek mortgage lending.

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Leith van Onselen

Comments

  1. Unrestricted foreign investment, this policy will do bugger all to fix the issue of housing.

    income to mortgage ratios need to return to what they were with the baby boomers, 3 to 4 times earnings.

    • flyingfoxMEMBER

      while I agree with your sentiments, atleast they are acknowledging that this is an issue and trying to do something about and not bury their head in the sand like Oz.

      • That’s right. Kudos to them for making the statement very explicit also.

        I think that they are being careful not to immediately crash house prices – putting a cap on low LVR lending an slamming the door on foreign investment (if the RBNZ even has the power to do this) would be politically unpalatable.

        The foreign investment piece is something they might get to in 6-12 months time when the storm has settled.

  2. Thank you Leith for reiterating that the supply side fix is the real solution. Restrictions on lending will have minimal impact on price and will really just restrict creditworthy borrowers accessing the housing market.

  3. What proportion or percentage of home loans written in NZ are currently over 80%? I can’t find any information on that.

    Will this affect “Family guarantee” loans?

    If someone has to miss out to keep the numbers under 10% – who will miss out, how will they select the winners and losers?

    Will ancillary loans become prevalent to make up the deposit requirements, which will make the homeloans more risky with higher combined repayments, as we used to have here pre Keating changes.

    I note that QBE will cease writing LMI in NZ because they don’t believe there will be sufficient business to make it worthwhile – why? Are the numbers low anyway? Now NZ will only have one LMI provider which is another added risk to the system.

    I’m not seeing any convincing arguments in favour of this change. Why didn’t they just reduce the Max LVR to 90% or 92% or 88% or whatever did the trick for them. Why run a lottery on home loans, why not give some guidance and certainty instead of maybe’s?

      • Phwoar! That’s huge – 66% of low LVR business will have to disappear (before any workaround are found).

      • OK – that’s significant. Watch for a spike in unsecured debt such as personal loans two months after the regs cut in, and a spike in family guarantees.

        Initially they mentioned a 6 month period of grace to allow the loan pre-commitments to be honoured.

        Work arounds will be easy for those earning good wages, but the couples at the bottom will be prevented from buying a house. Is that what they wanted to achieve?

      • Anecdotally I know that the practice by banks of using personal loans to top up mortgages already happens. The practice will probably accelerate.

      • If personal loans are written to get to the desired “equity” amount would it not be the case that such funding would be a) more expensive and b) subject to greater capital requirements?

        If so, these factors, working together, ought to discourage at least those at the margin from pursuing this strategy.

      • Gerard – yes that’s true, but they won’t necessarily get the personal loan from the same bank. Anyway the bank giving the personal loan simply stumps up extra shareholder equity, which is a cost, but they get it back in the greater spread on a personal loan.

        The only constraint that I see is the tolerance of the bank granting the home loan. In Australia they don’t like borrowed equity one little bit, but if it’s seen as a way of getting it done in NZ and the home loan is kept under 80% then it’s possible it will be tolerated, as long as the aggregate lending commitment services.

    • By starting at 10%, Peter, there’s nothing stopping them going to 5%, then 0%, making 80% LVR universally applicable. Then 10% of 75% if necessary etc….

      • That’s true Janet, except even less houses will get built, and it all just spirals downward, ever downward.

        Contrast that with the small temporary oversupply in Victoria after they opened the floodgates in 2008/09. Are you really seeing a long term solution with this policy.

        It looks like an amateur dart throwers contest to me.

      • Well let’s just say that I reckon they’ve achieved a 20; hit the wire and bounced off, and missed the board completely, when a score of “One Hundred and Eighty….” was needed. Until the darts of taxation reform; land use reform and mortgage criteria reform are all thrown in the same turn at the okey, we’ll always find it difficult to get back into the A League.

  4. This is terrible policy which is going to create a generation of renters with no capacity to create wealth.

    I remember my first property loan about a decade ago, it was well over 80% LVR (probably closer to 95%).

    I paid my LMI, diligently made extra repayments for a few years and presto, reduced the LVR to less than 80%. That property / loan has since helped me create most of my wealth (which is now invested in a diversified portfolio, not just property or lifestyle assets like my home).

    If Australia had limits on high LVR loans a decade ago, I probably would still be renting today and living week to week.

    What a terrible policy for New Zealanders.

    • “This is terrible policy which is going to create a generation of renters with no capacity to create wealth.”

      Yeah, cause buying into NZ’s bubble prices is a sure fire wealth creator. Give me a break. A decade or so ago you might have had a point. Not now.

      That said, the supply-side is the only way to fix the crux of the problem.

    • Greconomics, your comments seem to be predicated on the assumption that the future will be exactly like the recent past.

      If it is, you are right – the outcome will be a lot of disenfranchised renters.

      If you are wrong, the RBNZ may well be saving a lot of kiwis from themselves..

    • Perhaps if you hadn’t had access to 95% LVR a decade ago, and neither did your compatriots, the whole price structure would be lower today, as sales of a decade ago (yours, for instance) mayn’t have gone through?

    • @Greconomics, You telling me people can’t save a deposit to reach an 80% LVR loan, so they need a 95% LVR loan to create wealth?

      Right now we have people who have saved for years, and hold very good savings, but still can’t afford a home because the principle of the mortgage is way off scale, and they would default if the OCR returned to long term values. Because housing prices are too damn high!

      • Well actually no. Many people don’t have the capacity to save a 20% deposit, but they can and do make payments just fine. You may be superimposing your situation onto others, but it’s just not so.

        The battlers tend to be realists. They buy at the very low end, they take multiple jobs, grow their own veges and fruit, and they make ends meet on half the budget that others have.

        Can you give me a significant reason why they can’t have hopes and aspirations like everyone else?

      • Because all those ‘aspirational’ people that overextend themselves with no equity and no buffer in the event that their financial circumstances change are exactly what lead to the catastrophic deleveraging in most other developed countries in the last 5 years.

        “The battlers tend to be realists.”

        The experiences globally of the last 5 years would lead me to the exact opposite conclusion. People in general do an absolutely abysmal job of judging long term financial risk.

      • They grow their own veges and fruit? Is that a serious post or are you having a bit of a laugh on a Tuesday afternoon? If someone needs to do that in order to make a mortgage payment then they probably shouldn’t qualify for a mortgage.

        I think what we are seeing in this post is less about the hopes and dreams of battlers, and more about the greed of the person who sells them those hopes and dreams.

      • Yep making payments just fine = having multiple jobs, living on half the budget of these others…

        It’s called servitude. Keep em busy, don’t give em time to think, keep pushing housing as the only viable way to wealth.

        Just cut the flippin cost of housing. The system is broke, let’s just throw everything we have at fixing it.

      • You are being elitist, that translates to – “anyone making less money than you is a lesser person who has no right to a house regardless of how hard they work or how modest their wants are”

        Clearly there are not too many working men and women or disadvantaged couples blogging today. Maybe tomorrow.

      • If rent rates are too high to allow saving for a deposit, then that issue needs to be looked at, but the issue isn’t fixed by putting them into 95% LVR where they can be repossessed and lose everything because of an interest rate rise.

        Housing was never synonymous with middle-class “Wealth creation” until the late 90’s. Before that the saying used to be “as safe as houses”, but now it’s all about high risk and high returns.

        Some people like to tell everyone it’s low risk, high returns – a new paradigm.

        There’s no new paradigm and we need to return banking to the structure we had a generation before.

      • Many people don’t have the capacity to save a 20% deposit, but they can and do make payments just fine.
        Makes no sense. If they can make payments, they can save for a deposit. The only difference between the two is timing.

    • flyingfoxMEMBER

      Just admit it. You got there first and now think everyone else is either lazy or stupid not to pile themselves with debt to become uber rich. Do you really think the last 10-20 years are what is economically considered normal?

      You should ask your prop investor friends who invested in the last couple of years how they are doing?

      BTW I think most would want a 80% lvr on a $500K property than an 95% lvr on $1 M property.

  5. Great to see the RBNZ take some action here. Sure, it would be even better if there was supply side reform as well, but that isn’t in their domain.

    It is reassuring to see that the enactment of this policy has upset some of the FIRE vested interests. It is a good indicator that it is likely to achieve the desired result.

  6. Phew, just as well Australia doesn’t have a housing bubble or Glenny would be all over this!

  7. Maybe we in New Zealand have closed barn the door after the horse has bolted, but at least we know where the barn is. I’m not sure you do……

    • Can we see this as a game changer? is limiting the LVR effectively closing the entrance to the housing ponzi scheme and change that to a musical chair game where investors passing IP to one another until the music stops?

    • Hi Janet, I think you mentioned before that they may use NZ as the test dummy and depending how that works out introduce the same medicine in Australia, we’ll find the barn after Sept 7 and try round up what horses are still alive.

  8. Ronin8317MEMBER

    While some action is needed, the 80% LVR limit has two problems. Firstly, the unscrupulous can bypass with a personal loan. Secondly, it’ll be impossible to save for the deposit and have a kids at the same time unless you’re rich.

    I believe there is a better way : keep the LVR the same, but put a limit on the period a home loan can be taken over. So instead of a 30 years mortgage, you must now pay it off in 20. It reduces the maximum amount that can be loaned without the extra 3-5 years needed to save up for the deposit.

    • The idea is to stop unscrupulous lenders locking consumers into risky loans.

      “Unscrupulous” consumers bypass the system, aren’t really be unscrupulous, and this is not a problem caused by this change.

      95% LVR has the problem of causing banks to ask Governments for bailouts.

      RBNZ is doing the right thing in protecting this from occuring.

      Pity the current RBA aren’t as accountable.

  9. A good start, and some jawboning from the RBA on this front would be helpful.

    But for the reasons mentioned above it is passive speculators in established property that need to be targeted. These are the social vermin that seek to do nothing other than beggar their neighbour because of their access to cheap debt and they should be belted hard.

  10. A good move, but too late. Shame the same isn’t happening in Australia, but if other LMI providers follow QBE who have increased mortgage insurance by 9%, this will also limit borrowing power.