The Reserve Bank has eased loan-to-value restrictions on bank lending, saying it is confident bank balance sheets can withstand the greater risk. But the restrictions could increase house prices — or at least stop them from falling, as they have in Sydney and London.
Loan-to-value restrictions set rules on how large a deposit needs to be for banks to grant a loan and how many low deposit mortgages banks are allowed to grant. Restrictions can have two effects: by making lending more difficult they can bring down house prices; and by forcing banks to demand higher deposits, LVRs make it difficult for them to approve risky lending.
The Reserve Bank introduced LVRs in October 2013 as house price growth accompanied by a sharp increase in low-deposit loans threatened to weaken bank balance sheets. It eased the restrictions earlier this year and signalled further easing could be on the way.
The changes announced today mean that from January 1, 2019, banks will be able to give up to 20 percent of new loans to first home buyers who have deposits of less than 20 percent.
Currently only 15 percent of a bank’s loans can go to new owner-occupiers who can’t come up with a 20 percent deposit.
Restrictions on investors have also eased. Banks will be able to provide 5 percent of new loans to investor borrowers with less than 30 percent deposits. Previously, the deposit cap was 35 percent.
Essentially, this means it is now easier for both first home buyers and investors to get a mortgage – and that could push up prices, even as house price inflation remains strong outside of Auckland and Christchurch.
First home buyers competing with investors
Reserve Bank Governor Adrian Orr did not say how long the restrictions would be in place for.
Orr said he would want to see bank lending behaviour “remain sound and responsible” and “elevated risks” around household debt reduced before easing restrictions further.
The bank has no direct responsibility to contain house price growth, but it does have a responsibility over the stability of the wider economy. This means the bank must make sure household indebtedness doesn’t spiral out of control to the point where it threatens the wider economy by taking down a bank, for example.
With house prices easing and lending standards improving, the Reserve Bank is confident that banks have enough quality loans on their books to survive a shock like the financial crisis. This means they will be allowed to take on riskier loans.
This could be bad news for first home buyers, as the changes allow more investors to compete with them.
Orr said that while house prices “very much” factored into the RBNZ’s thinking when making LVR decisions, the bank could only decide lending standards. However, he said the bank was pleased to see that first home buyers have been getting good access to the higher LVR loans. Two-thirds of such loans have been going to first home buyers, “meaning banks are thinking hard” about how they allocate their quota of low-deposit loans.
“Where they then lend to is up to the banks and obviously the growth that we’ve seen in bank lending has been to the housing sector… and in part that has been underlying a lot of the house price inflation,” Orr said.
He said he was pleased that house price inflation had “eased” from the recent rapid rises “towards something low and more consistent with income growth”.
He said declining house prices would be a concern as they led to economic loss.
“A big concern that we have is following very rapid and elevated house price increases in any instance there’s a like expectation you can see the reverse of that and that is what leads to economic loss and distress throughout so we are pleased to see that house price inflation in aggregate has eased more towards something low and more consistent with income growth,” he said.
That could be bad news for first home buyers hoping New Zealand prices will follow Sydney and London and head down.
Reserve Bank believes prices will stay high
The RBNZ does not believe house prices will fall as they have in major cities overseas.
Orr said that while he could not rule out a drop, it was likely prices here would stabilise rather than fall due to several unique factors.
“We have had strong net immigrant meaning there’s real demand, we’ve had real supply constraints about the building going on and we haven’t seen as tight lending restrictions coming through as you have in other systems,” he said.