Reserve Bank may lift mortgage loan-to-value restrictions after house price falls

Wednesday, 26 April 2023

House prices have tumbled making them less of a threat to financial stability, the Reserve Bank says.

The Reserve Bank Te Pūtea Matua could ease loan-to-value restrictions on home loans in June after large falls in house prices.

Currently, banks are limited in the amount of high loan-to-value ratio (LVR) loans they can make to home-buyers with less than 20% deposits, and to investors with less than 40% deposit or equity in the deal.

The restrictions were put in place by the Reserve Bank in an attempt to slow rapid rises in house prices, which it said were a threat to financial stability.

The current restrictions limit the proportion of new mortgages issued by banks to new owner occupiers with less than 20% deposits to just 10% of new lending.

* New controls on mortgage lending at least a year away

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Recent house price boom is down to interest rates, as Kiwis jumped to buy better homes while rock-bottom rates were around.

The proportion of new loans banks can make to investors with less than 40% deposits is just 5% of their new loans.

But the Reserve Bank is proposing to lift the limit on loans with LVR above 80% for owner occupiers to 15% of banks’ new lending.

For investor loans from June 1, banks would be allowed to lend 5% of their new loans to investors with less than 35% equity.

There are exemptions from the rules for new-build properties.

The Reserve Bank will consult with banks on the changes for the next two weeks.

“LVR restrictions promote financial stability by limiting high-risk mortgage lending,” Reserve Bank deputy governor Christian Hawkesby said.

Reserve Bank Deputy Governor Christian Hawkesby says the chance of further large house prices falls has reduced.

“This is done with the aim of reducing the impact and severity of housing market corrections by increasing the resilience of the banking system and households.

“Current LVR settings were put in place November 2021 when risks were elevated. The restrictions built resilience in the financial system, which has been evident in the past year as house prices have fallen without widespread impacts to financial stability.

“Our assessment is that the risks to financial stability posed by high-LVR lending have reduced to a level where the current restrictions may be unnecessarily reducing efficiency.

“In particular, impeding the provision of credit to some otherwise creditworthy borrowers, which is not proportionate to the level of risk that we see,” Hawkesby said.

He said national house prices had fallen towards a level that was more consistent with medium-term fundamentals.

“As a result, while house prices may continue to fall, the probability of a further large correction in house prices has reduced,” Hawkesby said.

“Alongside this, lending conditions have tightened significantly as banks’ debt servicing assessments allow for higher interest rates.”

He said the restrictions on high-LVR residential mortgage lending set a “speed limit” on how much new low-deposit lending banks could do.