The Reserve Bank to relax the speed limits on High Loan to Value Ratio Lending and additionally ​more loosening of the rules expected in the future.

The Reserve bank has pronounced to lighten the rules about the high loan to value ratio (LVR) housing lending in an expected move that might encourage the housing market.

The development was announced on 27thNov as part of the bank’s latest Financial Stability ReportFrom 1 January 2019:

  • Up to 20% (increased from 15%) of new mortgage loans to owner occupiers can have deposits of less than 20%.
  • Up to 5% of new mortgage loans to property investors can have deposits of less than 30% (lowered from 35%).

This is the next lightening of the LVRs, first introduced in the year 2013, which the RBNZ has is very much similar to what the Central Bank had done in its FSR in November 2017, which at that time necessitated raising the speed limit for owner-occupier loans from just 10% of new bank lending to 15% from January 1 this year. The investor restrictions were relaxed from a requirement for 40% deposits to just 35% deposits.

The lending data in upcoming months after the January easing recommended that the easing of the rules did have a somewhat stimulatory impact on the market.

The moves to relax the rules for owner-occupiers will be especially welcomed by first home buyers. However, the decision to also lighten the rules for investors, which were an essential part in reining in the housing market after they were introduced in 2016, may be seen as more debatable and risky.

In making the announcement on Wednesday, RBNZ Governor Adrian Orr stated “Risks to New Zealand’s financial system had eased over the past six months (since the last FSR), but vulnerabilities persist. In particular, households remain exposed to financial shocks due to their large mortgage debt burden.

“However, both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending.

“In response, we are easing our loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained we expect to further ease LVR restrictions over the next few years.”

Nick Tuffley, ASB chief economist hinted he was a bit surprised that the RBNZ had also decided to loosen the rules for investors, as well as the owner-occupiers.

“The housing market has been at an interesting juncture recently.  Sales turnover and listings rose sharply in October.  A beat-the-foreign-owner-ban rush was one probable reason in some parts of the country. 

“But mortgage rates have been falling for months, with sub-4% rates now available to borrowers with 20% equity.  House price growth has been strong in a number of provinces and been accelerating in some. 

“So relaxation of the LVR restrictions is not without some risk, even though Auckland risks are slowly dissipating through a sustained period of flat prices.”

ANZ senior economist Liz Kendall said the LVR loosening was “modest”.

“We anticipate that this easing will boost the housing market, but only a little, with the restrictions remaining ‘tight’ overall. 

“We expect that further easing will occur in time, but that the RBNZ will continue to tread cautiously. Household debt and house prices remain high and the risk of resurgence in the housing market cannot be ruled out, given low mortgage rates and still-strong population growth. Any improvement in vulnerability metrics will continue to be a slow grind, short of a fundamental change in market conditions.”

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