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.