Lending rules might have worked too well

After six years, it’s time to take another look at the narrative around the loan-tovalue ratios.

Loan-to-value ratios (LVRs) hold a special place in my heart. The controversial caps on low-deposit mortgages were introduced back in 2013. As a fledgling reporter, this was my first big story.

These were only ‘‘temporary measures’’, I wrote. After all, the Reserve Bank had previously rejected them for being too intrusive.

Oh, the naivety of youth! Here we are, six years later, and the Reserve Bank has once again dashed hopes that it might finally lift the restrictions.

Cue another round of opinion headlines about the plight of first-home buyers, and investors receiving an unfair advantage.

But how bad is it, really? Having taken a fresh look at the statistics, I think the narratives around LVRs need some updating:

It’s hard to say whether they had any long-term cooling effect on house prices: maybe in Auckland, probably not in the rest of the country.

But that wasn’t really the point. The underlying goal was to improve financial stability and bank lending practices – and this might have worked almost too well.

In the early days, the banks didn’t push too close to the limits, for fear of accidentally breaching the rules.

What’s really surprising is that the restrictions have been loosened over the years, but the banks are still only writing ~10 per cent of loans to low-equity borrowers. That’s half their current allotment.

Other Reserve Bank regulations have no doubt contributed to this caution, but it’s not the LVR rules reining the banks in.

LVRs were tough on firsthome buyers to begin with, but the picture looks a lot brighter these days.

For one thing, first-home buyers now receive a whopping ~70 per cent of the limited lowequity loans.

More importantly, their share of total mortgage lending has doubled since the dark days, and in dollar terms, it’s almost quadrupled.

Changes to the LVR regime in 2016 made it all but impossible for investors to take out low-equity loans.

Would-be landlords and speculators currently receive a tiny fraction of the allotment: less than 1 per cent.

Of course, it’s much easier for cashed-up investors to get together a decent deposit, which is why they had such a big advantage to begin with.

Nevertheless, their share of mortgage lending has dropped sharply from highs of 35 per cent, to less than 20 per cent today.

It’s worth noting that the larger narrative here is also wrong: there wasn’t some golden age of home ownership which investors have stolen away from us.

Our owner-occupier rate is higher now than it was in 1951.

The LVR rules are of dubious benefit, but the

Reserve Bank’s refusal to remove them probably doesn’t make all that much difference.

The fact that banks are choosing not to load up on highLVR loans like they did in the old days tells us something useful.

If you can’t get a low-deposit loan in this environment – with the banks nowhere near their limits, interest rates at record lows, investor activity reined in, and foreign buyers banned altogether – the hard truth is that you probably shouldn’t be borrowing.

There’s a lot to be said for the boring old-fashioned requirement to save a 20 per cent deposit.

If interest rates surge, or house prices crash, or we have another recession, the ‘‘stress tests’’ suggest the banks will come through OK.

But lots of individual borrowers won’t. When you’re underwater on the mortgage and just lost your job, it’s not much comfort to know the overall financial system is robust.

Former Reserve Bank governor Graeme Wheeler used to say the LVR restrictions would be good for first-home buyers in the long run.

I have no love for the unelected technocrats who seem to wield more and more power over our financial decisions.

But it’s possible – just possible – that Wheeler might actually have been right.