Reserve Bank forecasts '1% to 2%' drop in house prices from LVRs

Tuesday, 8 December 2020

Hundreds of people passed through the Harcourts Gold Papanui auction house on December 3, 2020, as the city's property market continues to heat up.

The Reserve Bank is forecasting that reimposing loan-to-value (LVR) restrictions on mortgage lending from March 1 will only decrease house prices by 1 or 2 per cent.

That is relative to the price that housing might be if the controls were not restored.

The Reserve Bank made the forecast in a consultation paper which appears to have been issued mostly as a formality on Tuesday inviting submissions on its previously announced proposal to reinstate LVRs.

The return of LVRs has been prompted by concerns buyers are taking too many risks taking on big loans against an uncertain economic backdrop due to Covid-19, threatening financial stability, the bank said.

* The politics of money return after 30 years in the wilderness

The Reserve Bank has indicated the return of LVRs is more about keeping a lid on risky lending, rather than resetting the housing market, this time around.

* Landlords racing to beat the return of loan-to-value restrictions

The bank calculated that when it first imposed LVRs in 2013, they had probably led to a 3 to 6 percentage point reduction in house price inflation, with most of the impact happening in their first year.

But it is forecasting a lesser impact this time round, given the starting point was different, with there already being less risky lending.

The controls should simply ensure more risky lending to owner-occupiers did not increase, while keeping “high-LVR” lending to investors on its previous downward trajectory, it said.

However, given housing markets could suffer from “irrational exuberance”, LVR restrictions should help to guard against a possible further acceleration in house price inflation, it said.

The Reserve Bank had not forecast and was instead taken by surprise by a strong rise in house prices post-Covid.

But it reiterated it was not directly targeting house prices.

“Neither the long-run level of house prices nor housing affordability are objectives of the LVR restrictions,” the bank’s paper said.

“However, by limiting highly-leveraged purchasing, LVR restrictions may moderate house price volatility somewhat – moderating price increases in upturns and price decreases in downturns.”

Concerns there may be a rush to buy housing ahead of March 1 are being played down by the bank.

The Reserve Bank said the date would give banks time to clear their existing pipeline of lower equity loans that had been approved but not yet settled.

But in practice it was likely riskier lending would decrease well before then, as banks prepared for the change, it forecast.

“Indeed, most of the sector has already stated they are adjusting their lending standards, following our announcement of this consultation,” it said.

The central bank has confirmed it is proposing a return to the same LVR regime that applied before the Covid pandemic.

That means banks would only be able to write a fifth of the total value of their new lending to owner-occupiers who had less than 20 per cent equity, and at most 5 per cent of new lending to property investors at LVRs above 70 per cent.