The Press

Loan ‘speed lim­its’ make a re­turn

- Dileepa Fon­seka dileepa.fon­

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.

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 ??  ?? Re­serve Bank gov­er­nor Adrian Orr
Re­serve Bank gov­er­nor Adrian Orr

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