‘Every reason’ to expect easing of LVRs

There are predictions that restrictions on home loan lending could ease as soon as next Wednesday.

The Reserve Bank will release its latest financial stability report on November 28.

ASB chief economist Nick Tuffley said it was possible the central bank might choose that moment to start to unwind the loan-to-value ratio (LVR) restrictions that limit how much lending banks can do to borrowers with small deposits.

At the moment, only 15 per cent of new lending can be to owneroccupiers with equity of less than 20 per cent. Another 5 per cent can be to investors with equity of less than 35 per cent. People borrowing for new builds are exemptz.

Earlier this month, the Reserve Bank’s deputy governor, Geoff Bascand, said it was pondering the future for LVRs.

Tuffley said there was ‘‘every reason’’ to expect some form of relaxation of the rules. The central bank had already relaxed the LVRs from their initial level and the risks to the financial system had reduced further since then, he said.

‘‘House price growth is moderating overall. And in Auckland, the region seen at most risk of a damaging housing correction, prices have been essentially flat for the past two years,’’ Tuffley said.

‘‘There, further overheating seems unlikely, and a soft landing appears to be happening as the demand and supply sides both respond to changing drivers.

‘‘The risk of a material fall in prices appears to have reduced, and house prices are less stretched compared to household incomes than they were back in 2016.’’

He said there was a risk that easing lending restrictions could boost growth in provincial areas, where prices are still increasing,

‘‘But, relative to local incomes, prices in these areas are not as stretched as they are in Auckland . . . [and] banks are in an even more resilient position to weather any loan defaults.’’

On the other hand, Tuffley said, there were reasons for the Reserve Bank to delay a decision, including low mortgage rates and the chance that a reduction could lead to a pickup in low-deposit lending.

‘‘If credit growth did pick up again it might start to run ahead of household income growth, pushing debt versus income to fresh records.

‘‘Auckland’s gradual adjustment to less-stretched valuations relative to incomes is occurring in a very orderly fashion, so why rock the boat?’’

If a change was made this month it would probably be to the owneroccupier limit, Tuffley said.

‘‘Easing owner-occupier restrictions sits very much with the Government’s policy focus of enabling owner-occupiers to purchase while also putting up added hurdles for residential property investors.’’

He said while it was a ‘‘line-ball call’’ next week, the restrictions would eventually be released at some point to a level where they did not restrict borrowers. ‘‘After all, the LVR restrictions were supposed to be temporary, yet have been in place for five years and counting.’’

Economist Cameron Bagrie said there was a risk that low interest rates could fuel the market.

‘‘But I think the Reserve Bank can have enough faith in the banks tightening their credit criteria, which will help keep the market contained to slightly relax LVRs a little,’’ Bagrie said.

‘‘Affordability constraints in Auckland and a raft of government policy changes hitting property investors will help keep the property market contained, too.’’

‘‘After all, the LVR restrictions were supposed to be temporary, yet have been in place for five years and counting.’’ ASB chief economist Nick Tuffley