LVR move could cut house prices

House prices could fall 1 to 2 per cent if bank low deposit lending restrictions are reinstated by March, according to the Reserve Bank. A consultation document released by the central bank outlining its plans to bring back loan-to-value restrictions show it is unlikely to be a panacea for rising house prices.

Those prices have risen more than 10 per cent in the past year despite New Zealand plunging into the Covid pandemic.

The situation has prompted Finance Minister Grant Robertson to write to Bank governor Adrian Orr asking him to take account of house prices when making decisions.

The Reserve Bank yesterday opened consultation on its plan to bring back loan-to-value lending restrictions from March, two months earlier than expected.

The central bank dropped LVR restrictions on April 30 in a bid to ensure there were no barriers to banks offering home loan deferrals during the pandemic.

But a faster than expected recovery in the economy and a run in the housing market has prompted the bank to bring them back sooner.

Geoff Bascand, Reserve Bank deputy governor and general manager of financial stability, said lending at higher loan to value ratios had risen, particularly for investors and there were signs it was accelerating.

Under its proposal, banks would be restricted to giving up to 20 per cent of new lending to owner occupiers with a deposit of under 20 per cent and less than 5 per cent to investors with a deposit under 30 per cent.

Reinstating the restrictions from March would give banks time to clear their existing pipeline of high loan-tovalue ratio loans that had already been approved but not settled.

ASB, BNZ and ANZ have all said they will start restricting lending to investors with a deposit of under 30 per cent before then while Westpac has said it did not change its lending policy despite the lifting of the restrictions.

The report notes that it was likely that new high-LVR lending would decrease well before the March 1 reinstatement date.

But it seems the impact on house prices will be limited.

The Reserve Bank does not have a mandate to directly target house prices.

“Our aim is to limit the risks to financial stability associated with high-risk lending in the housing market,” the paper said.

The fall in house prices may also result in a fall in spending as people feel less wealthy. The Reserve Bank noted its research had found that on average people spent 3c more on consumption for each dollar increase in their house wealth.

But a fall in house wealth had a larger impact on reducing consumption than an increase in housing wealth had in boosting it.

But over the longer term, if LVR restrictions were effective in reducing the magnitude of a potential house price correction, this would support consumption in a downturn and thereby economic growth and employment.

“While the economic impacts of reinstating the LVR restrictions on 1 March, 2021, are likely to be relatively minor, we consider the overall economic impact will be positive over the long run. We expect a temporary, small negative effect on economic activity, however, the benefits to financial stability and longterm economic outcomes outweigh this temporary effect,” the paper said.

Submissions are open on the consultation document until January 22 with a decision expected to be made in February.