The Reserve Bank of New Zealand (RBNZ) has released its bi-annual Financial Stability Report (FSR), which notes that its macro-prudential caps on high loan-to-value ration (LVR) mortgage lending will remain for the foreseeable future:
“The financial system faces the same key risks that the financial system faced at the time of the May Financial Stability Report, although the balance of these risks has shifted in the past six months.
“The first of these relates to housing market imbalances. Pressures have eased since the introduction of the loan-to-value ratio (LVR) ‘speed limit’ in October 2013 and subsequent increases in interest rates.
“We have always indicated that the LVR restrictions are a temporary measure. The reduction in house price inflation and housing credit growth are welcome developments, along with indications of increased residential building. However, there remains a risk of a resurgence in house price inflation, particularly in light of strong immigration flows. Consequently, we do not consider it appropriate to ease the LVR speed limit at this time. The Reserve Bank will continue to closely monitor the housing market”..
The RBNZ also outlines three criteria for removing its LVR restrictions, whilst also providing evidence of its impacts:
In identifying criteria that should guide the removal of LVR restrictions, three considerations are particularly important. These are:
• whether house price inflation and housing credit growth have returned to more sustainable levels;
• the risk of a resurgence in housing market pressures after the removal of the restrictions; and,
• whether the policy is creating significant market distortions.
The removal of LVR restrictions also needs to be assessed in relation to broader financial conditions, including monetary policy settings. Table 2.2 shows some of the key indicators illustrating the impact of the LVR restrictions.
The housing market has cooled since the introduction of the LVR restrictions in October 2013. The volume of house sales is about 12 percent lower than when the policy was introduced. Although many factors influence housing market conditions, the LVR restrictions are judged to have had a substantial impact on housing demand.
The decline in house sales has contributed to a moderation in annual house price inflation, from over 9 percent in September 2013 (on a three-month moving average basis) to 5 percent in September 2014 (table 2.2). Importantly, house price inflation in the Auckland region, which reached 17 percent in August 2013, slowed to below 9 percent in September 2014. The slowing in house sales and house price inflation has also resulted in annual housing credit growth falling by just over one percentage point between September 2013 and September 2014.
The level of risk in banks’ housing loan portfolios, as measured by the proportion of high-LVR lending, has substantially reduced since the introduction of the LVR restrictions. The aggregate share of high-LVR lending relative to new housing loan commitments was 7.3 percent at the end of September (and 6.8 percent on a three-month moving average basis) – comfortably within the 10 percent ‘speed limit’ (figure 2.7). The total proportion of high-LVR mortgages in overall bank mortgage loan portfolios has fallen from over 20 percent in late 2013 to just over 16 percent in June 2014.
The RBNZ also vigorously disputes claims that the LVR restriction have distorted the housing market:
There is no evidence that the LVR restrictions are creating significant distortions in the housing market that outweigh the effectiveness of the policy. The Reserve Bank received feedback from the building industry in late 2013 that the restrictions could impede new housing construction, which would compromise the effectiveness of the policy. In December 2013 the policy was amended to exempt high-LVR lending for new home construction. Residential building permits have increased steadily during 2014.
The LVR policy may create distortions by affecting some types of buyers to a greater extent than others. The proportion of first-home buyers dropped immediately after LVR restrictions were introduced, though this partly reflects an unwinding of a surge in first-home buyer sales in 2013. The proportion of first-home buyer sales has settled at a level in 2014 (about 17 percent) that is a little lower than the average since 2005 (see figure 4.5, chapter 4)…
The Reserve Bank has recently published data on mortgage commitments by buyer type (figure 4.6).2 As of September 2014, around 10 percent of commitments are to first-home buyers, 60 percent to other owner-occupiers, and 30 percent to investors. Of the 8.4 percent of lending undertaken at high-LVRs (before exemptions), around 35 percent is to first-home buyers and 55 percent is to other owner-occupiers…
There is no evidence of significant avoidance activity. Banks have complied with the ‘spirit’ of the policy. Consumer lending has increased steadily from late 2013, and while some of this may have been associated with housing lending there has also been a general increase in consumer durable purchases. Non-bank mortgage lending, a potential source of ‘regulatory leakage’, has not increased materially since the LVR policy was introduced…
On a related note, Interest.co.nz has also reported that the RBNZ is considering making banks hold more capital against investment property loans, but is unsure about whether to apply an income-based rule rather than a set number of properties per investor. The new requirement was rumoured to begin from December, but will instead be delayed until at least the first half of 2015 while the RBNZ continues consulting with banks.
It’s great once again to see the RBNZ act so proactively on housing market risks. They could teach the RBA a trick or two.