Reserve Bank set to signal how it might lift LVR restrictions
Monday, 27 November 2017
Four years after forcing banks to require hefty deposits from homebuyers, the Reserve Bank is expected to finally outline how it will go about removing its 'temporary' loan to value ratio (LVR) restrictions.
Introduced in 2013, LVRs were designed to protect the banking system from the danger of mortgage defaults in the event of a housing market downturn, as prices around New Zealand surged.
Almost all borrowers since then have required a deposit of at least 20 per cent of the value of the property, a move criticised for making it more difficult for first time buyers to get on the property ladder. Tighter restrictions aimed specifically at property investors were added in 2016.
Although the restrictions are described as 'temporary', the Reserve Bank has said little about when they could be removed, aside from when it 'judges that the risks that the housing market poses to financial stability have lessened sufficiently'.
**READ MORE:
* Lifting of LVRs unlikely until at least mid-2018
* REINZ wants loan-to-value restrictions lifted
* Link between elections and property**
In August, then Prime Minister Bill English said it was time for the Reserve Bank to give details of how it might relax the restrictions, on growing signs that the housing market is slowing.
On Wednesday acting governor Grant Spencer is expected to reveal publicly the work the central bank has done in determining when the rules could be relaxed.
In early November, Spencer said the Reserve Bank was now confident house prices increases would remain moderate, partly due to government plans to ban foreign buyers and cut immigration rates. Work was underway to examine how the LVR restrictions could be removed.
'We're certainly reviewing the restrictions and the criteria that we would adopt for their removal,' Spencer said, adding that if the LVRs were lifted 'it wouldn't be done in one hit, it would be a gradual'.
More detail will be given when the Reserve Bank releases its six-monthly update on the health of New Zealand's banking system on Wednesday.
BNZ senior economist Craig Ebert said observers would be closely watching what the Reserve Bank said on the lending rules, as the market knew little about the criteria for relaxing the rules.
'[The LVRs] were born of an imperative, and rushed is probably too strong a word, but they were sort of developed and instituted on the hoof…and they haven't been clear what the exit strategy is,' Ebert said.
While the idea behind the rules was simple, meaning the criteria for lifting should also be straight forward, it was not clear what had happened to reduce the risks posed by higher house prices since, with average prices far higher now than when the LVRs were introduced.
'If you believe there was a financial stability issue, one, two, three years ago, how is it less vulnerable now?,' Ebert said.
'We're not forecasting any sort of crash, but we do acknowledge house prices are extremely stretched, to any reasonable sense of economic fundamentals, and when you're starting in that position, it doesn't take much for the rug to be pulled from under it for a correction to end up being quite nasty.'
Victoria University of Wellington chair in public finance, Professor Norman Gemmell said the uncertainty around the use of the rules came from the fact that they were new.
'The markets will soon work out when they think this is required; is it to do with a particular inflation of house prices in Auckland, or something a bit wider than that.'
But Gemmell said house buyers would want to know what was happening with the rules in order to help them make long term plans about what they could afford with their deposit.
'You've got to be fair to people in the market so they can make informed decisions; after all, these are decisions people are making over 20, 30 years.'