LVR restrictions at odds with Government: Eaqub
If Reserve Bank “speed limits” on high loan-to-value lending are going to have an impact, they will need to come in before the Government introduces its changes designed to get more first-home buyers into properties, an economist says.
Wednesday, August 14th 2013, 12:00AM 
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The Reserve Bank yesterday released its response to submissions on high-LVR restrictions and confirmed when it introduced restrictions, it would do so as a proportion of the new high-LVR lending a bank did, rather than restricting low-deposit loans altogether.
No official decision has been made on when to deploy the tool but it seems they are not far off.
Deputy governor Grant Spencer said: “This ‘speed limit’ approach would enable many high-LVR borrowers to continue to obtain mortgages.”
He said restrictions would dampen excessive house price growth in periods when credit growth was boosting housing demand beyond supply. “In so doing, they can reduce the risk of a rapid correction in house prices and the economic and financial instability that would ensue.”
Banks would be allowed to exempt a limited number of categories of high-LVR loans, when calculating their compliance with a specific speed limit. Those loans would include Housing New Zealand mortgage-insured loans, bridging loans, refinancing loans and high-LVR loans to borrowers who are moving home but not increasing their loan amount.
NZIER economist Shamubeel Eaqub said the message the bank was trying to send was exactly counter to what the Government was doing by making it easier for some borrowers to access Welcome Home Loans and the KiwiSaver first-home subsidy.
The Government announced at the weekend that it would increase the income threshold for couples to qualify for both schemes to a combined $120,000, although the threshold for a single person has been cut slightly to $80,000. It is expected to mean just over 25,000 more people get some Government assistance to buy their first homes, over the next four years.
Eaqub said while the number of people affected might be small in real terms, the Government’s move sent a message that was contrary to what the Reserve Bank was trying to achieve.
Spencer made it clear that banks would be expected to follow the spirit, not just the letter of the LVR limits.
Eaqub said that clearly showed that the bank wanted to limit the amount of high LVR lending that went to those who could least afford it. But the Government’s move was trying to drive lending to those lower-income households.
“It’s about the directive the Government is sending, that it wants to support people to buy homes when prices are already high and rising.”
People who needed that Government help would be the most hurt in the case of a price correction, Eaqub said.
Because banks often issue pre-approvals that are valid for six months, so the Reserve Bank would initially require banks to meet a speed limit measured as an average rate over a six-month period. “Thereafter, the speed limit for banks with lending in excess of $100 million per month would apply to the average rate over three-month windows, as originally proposed. However, we would expect the banks to modify their approach to issuing pre-approvals, in order to ensure that they fall within any speed limit on an ongoing basis.”
Those lending under $100 million would continue to be assessed on six-month windows.
Banks would get two weeks’ notice of limits.
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Comments from our readers
The problem is we simply do not know who is buying houses - we have no statistics, only anecdotal stories. And that makes for bad policy.
As a simple minded economist my take is that if you push interest down to historic lows while the economy is doing OK you will get asset bubbles. Shares and house prices will rise quickly. And they are.
The dilemma the RBNZ has is that interest rates in NZ should be much higher than they are now.
But they are worried if they did push interest rates up the NZD will rise further. The domestic economy would eventually slow, but via an export slowdown.
And the traditional signal to raise interest rates is inflation, which has not budged yet. (Although I suspect central banks might finally be getting that asset prices are something to watch.)
The RBNZ are just looking at new tools to try to slow the domestic economy rather than the export sector. LVR is one possible tool.
I doubt restricting ownership to NZers will make any real difference. In a world of ultra low interest rates, you will create asset bubbles anyway.
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Fact - First home buyers and borrowers with less than 20% deposit are NOT the cause of increased property values in Auckland. The so called "experts" at the Reserve Bank with all their economic degrees between them don’t seem to be able to understand this very simply fact while every experienced lender in Auckland (and the rest of the country) acknowledges this already. First home buyers relying on their Kiwisaver funds for a deposit barely have the capacity to make one or two offers before been outbid by an overseas buyer (with cash) or a kiwi property speculator with ample equity in multiple existing properties. To attend an auction in the Auckland suburbs and inflate property values you actually need to be the buyer with the highest offer when the hammer falls!
Until the Government wakes up and changes the law so that only New Zealand citizens can own residential property in New Zealand NOTHING the Reserve Bank is tinkering with at present will have any impact whatsoever on property prices in Auckland. I am sick and tired of certain commentators claiming any mention of “overseas buyers” been the cause of Auckland’s problems is xenophobic. Wake up! Look at who these purchasers are and where they are coming from. They do not even need mortgages from the banks here. No wonder property values are going up! We seem totally reliant on REINZ statistics for data on this subject thus dependant on land agents themselves to accurately record the citizenship of the property’s purchaser. Land agents have the most to gain financially from the current status been allowed to continue. Do really think that this data can be trusted then??? If the Reserve Bank limits kiwis to lesser mortgages requiring them to save more of a deposit towards a home they will only end up making it even easier for ownership of Auckland homes to go to more wealthy offshore buyers.