Market awaits lending rule move
Four years after forcing banks to require hefty deposits from home buyers, the Reserve Bank is expected to finally outline how it will go about removing its ‘‘temporary’’ loan-to-value ratio (LVR) restrictions.
Introduced in 2013, LVRS were designed to protect the banking system from mortgage defaults in the event of a housing market downturn, as house prices around New Zealand surged.
Almost all borrowers since then have required a deposit of at least 20 per cent of the value of the property, a move criticised for making it more difficult for first-time buyers to get on the property ladder. Tighter restrictions aimed specifically at property investors were added in 2016.
Although the restrictions are described as ‘‘temporary’’, the Reserve Bank has said little about when they could be removed, aside from when it ‘‘judges that the risks that the housing market poses to financial stability have lessened sufficiently’’.
In August, then Prime Minister Bill English said it was time for the Reserve Bank to give details of how it might relax the restrictions, on growing signs that the housing market is slowing.
Tomorrow acting governor Grant Spencer is expected to reveal publicly the work the central bank has done in determining when the rules could be relaxed.
In early November, Spencer said the Reserve Bank was now confident house price increases would remain moderate, partly due to the Government’s plans to ban foreign buyers and cut immigration rates.
Work was under way to examine how the LVR restrictions could be removed, he said.
‘‘We’re certainly reviewing the restrictions and the criteria that we would adopt for their removal,’’ Spencer said, adding that if LVRS were lifted ‘‘it wouldn’t be done in one hit – it would be a gradual’’.
More detail will be given when the Reserve Bank releases its sixmonthly update on the health of the banking system tomorrow.
Bank of New Zealand senior economist Craig Ebert said observers would be closely watching what the Reserve Bank said on the lending rules, as the market knew little about the criteria for relaxing the rules.
‘‘[The LVRS] were born of an imperative, and rushed is probably too strong a word, but they were sort of developed and instituted on the hoof … and they haven’t been clear what the exit strategy is,’’ Ebert said.
While the idea behind the rules was simple, meaning the criteria for lifting should also be straightforward, it was not clear what had happened to reduce the risks posed by higher house prices since.
‘‘If you believe there was a financial stability issue, one, two, three years ago, how is it less vulnerable now?’’ Ebert said.
Victoria University of Wellington’s chair in public finance, Professor Norman Gemmell, said the uncertainty regarding the use of the rules came from the fact that they were new.
‘‘The markets will soon work out when they think this is required; is it to do with a particular inflation of house prices in Auckland, or something a bit wider than that.’’
But Gemmell said house buyers would want to know what was happening with the rules in order to help them make long-term plans about what they could afford.
‘‘You’ve got to be fair to people in the market so they can make informed decisions; after all, these are decisions people are making over 20, 30 years.’’