Westpac reassesses preapprovals

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[UPDATED WITH RESERVE BANK COMMENT] Westpac is reassessing its existing low-deposit preapprovals and is warning some buyers that they may no longer qualify.

Tuesday, October 15th 2013, 10:26AM 4 Comments

by Susan Edmunds

Broker Christine Lockie said she had received notification from the bank last week that it was looking at approved buyers who were seeking loans of more than 80%. Some would not qualify.

The bank was reassessing the preapprovals under the criteria it is now using to keep within the Reserve Bank’s new loan-to-value speed limits. Only 10% of new lending can now be to borrowers with deposit of 20% or less.

ASB has already cancelled its low-deposit preapprovals.

Westpac said it would try to offer borrowers other options before removing their preapprovals entirely.

Real estate agents are reporting that the number of first-home buyers in the market has dropped markedly since the restrictions came into force.

Auckland's mayor Len Brown has said he will travel to Wellington to discuss the policy with the Reserve Bank and Government.

But in a speech today, deputy governor Grant Spencer defended the move. "We agree with most commentators that the key underlying issue here is a chronic housing supply shortage...But the period of rapid price increases over the past two years has coincided with very low interest rates and easier bank credit. Banks have competed aggressively for mortgage business and this has contributed to a ramp up in housing demand, which has far exceeded the available supply."

He said if that continued, prices would be vulnerable to a shock or correction. "The vulnerabilities built up during the 2000s housing boom have not unwound: house prices and household debt both remain elevated relative to international and historical norms. These imbalances leave New Zealand vulnerable to a fall in house prices at some point in the future. Such a fall, potentially triggered by an external financial shock, could cause real damage to New Zealand’s financial system and broader economy."

The stretch in house prices, particularly in Auckland, presented a risk to future financial stability. It made sense to dull demand a bit before it got too far ahead of supple, he said. If LVR restrictions were successful, there would be less need for interest rate hikes that would affect the rest of the economy.

But the price rise wasn't all due to a lack of supply, Spencer said. "We have seen the shortage of homes in Auckland emerge due to low construction rates over many years. But house price inflation has accelerated only over the past two years, over the same period that credit conditions became easier and population growth picked up with stronger net inward migration. It is relevant that house price inflation in Auckland has not been matched by rental inflation, which is less affected by credit conditions."

Lending to borrowers with small deposits was growing at twice the rate of lending to the rest of the market, making them especially vulnerable to any future price falls, he said.

"In the event that house prices fall, these borrowers are more likely to see the value of their house fall below the amount of debt they have outstanding – particularly if they have entered the market recently. This can lead to financial hardship, mortgage defaults and, potentially, stress across the broader financial system."

Spencer said the LVR restrictions' effects would be felt most keenly in their first year.

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