Loan ‘speed limits’ make a return
Loan-to-value restrictions will be brought back next year as the Reserve Bank and the Government trade blame over who should do more to rein in house prices.
The Reserve Bank made the announcement on loan-to-value ratio (LVR) restrictions in its latest Financial Stability Report yesterday.
The report is released every six months. It measures the stability of the financial system along with the health of the insurance sector and payments system.
In its report, the central bank stated that housing and market activity had rebounded strongly despite a correction earlier in the year.
‘‘A growing share of this lending is going to borrowers with low deposits, making these borrowers’ balance sheets more vulnerable to a correction. If this trend were to continue, the stock of low-deposit home loans on banks’ books would gradually rise to a level that would constitute a risk to financial stability.’’
To counter this, the Reserve Bank will bring back LVR restrictions early next year.
It predicted the move would largely affect property investors rather than owner-occupiers as most loans made to the latter were still being made within the previous LVR ‘‘speed limits’’.
‘‘The Reserve Bank intends to reinstate LVR speed limits at the same level they were set at prior to their removal in April this year. That is, no more than 20 per cent of new lending to owneroccupiers at LVRs greater than 80 per cent, and no more than 5 per cent of new lending to investors at LVRs greater than 70 per cent, after exemptions.’’
The report also observed that economic stresses from Covid-19 haven’t shown up on bank balance sheets, but the report predicts they will as government support schemes wind down and payment deferral schemes end.
Reserve Bank governor Adrian Orr this week received a letter from Finance Minister Grant Robertson asking him to take rising house prices into account when setting monetary policy.
Orr said he wasn’t surprised the central bank was being called on to help.
‘‘We would be absolutely remiss to have been surprised by a letter like that. All of these issues have been very high-profile for decades in New Zealand.’’
The Financial Stability Report also lays out the risks a downturn in house prices would bring to the economy.
Loans to households make up 60 per cent of all bank lending in New Zealand. Almost all of this lending (97 per cent) is made up of residential home loans.
‘‘The banking system would therefore be vulnerable to large losses if many households became unable to service their debts and the value of their residential properties were to fall significantly in a severe economic downturn.’’
The commercial property sector normally bears large losses during economic downturns, but now there is added uncertainty about what office and retail demand might look like after the pandemic.