Low equity lending running at half speed

The amount of low equity loans being written by banks is running at half of their allowable limits.

Tuesday, April 29th 2014, 3:32PM

The Reserve Bank said that high loan-to-value ratio (high-LVR) residential mortgage lending had fallen to 5.6% for the six months to the end of March 2014, which is little more than half what is allowed under its "speed bump" restrictions.

“Our initial assessment is that restrictions on high LVR lending helped reduce house price inflation," deputy governor Grant Spencer said. A more in-depth assessment of the policy and its impact on the housing market will be included in next month’s Financial Stability Report.

All banks have complied with rules that restrict high-LVR residential mortgage lending to no more than 10% of total new mortgage lending. In September 2013, before the introduction of the new rules, high-LVR lending was approximately 25% of all mortgage lending.

The restriction came into force on October 1 and March 31 was the end of the first six month period over which all registered banks had to comply. Future compliance with the high-LVR lending rules will be measured against a 3-month rolling average for banks with more than $100 million per month of mortgage lending (ANZ, ASB, BNZ, Kiwibank and Westpac) and a 6-month rolling average for banks with less than $100 million per month of mortgage lending.

ASB says banks are continuing to adjust to this new environment of lending, while that happens there is potential for this proportion to edge slightly higher. "However, we expect the proportion of new high LVR lending will remain comfortably below 10% as a buffer against breaching the limit."

Recent RBNZ communications continue to indicate it is comfortable with the effectiveness of the high LVR restrictions on the housing market. REINZ housing market data showed a further decline in house sales, although the effect on house prices has been more muted.

"The RBNZ has also reiterated time and again that an increase in interest rates is still the most effective way to rein in the housing market, with macro-prudential policy merely a complementary tool. We expect the RBNZ to follow up with another OCR increase in June, before an extended pause until December. Beyond that, we expect four further OCR increases, for the OCR to reach a peak of 4.5% by the end of next year. We expect that as higher interest rates take effect and new housing construction increases supply there will be further slowing in house price inflation."

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