RBNZ set to reduce high-LVR lending to 10%

The Reserve Bank of New Zealand (RBNZ), or Te Pūtea Matua, has announced that it will soon begin consulting on ways to tighten mortgage lending standards, as part of the central bank’s focus on ensuring borrowers are resilient to a range of future economic and financial conditions.

According to the central bank, the move comes amid an increase in high loan-to-value ratio (LVR) lending, as well as high debt-to-income ratio (DTI) lending.

This was particularly relevant given that house prices are “above their sustainable level”, having risen by 24 percent in the 12 months to March 2021.

As such, RBNZ has said it will look to further restrict the amount of loans that banks can issue with an LVR above 80 per cent, which it had already been restricted to 20 per cent of new lending earlier this year.

It is now considering limiting this to 10 per cent of new lending, in order to reduce the risks associated with “excessive mortgage borrowing”.

It will begin consulting on this change later this month, with a view to introducing it from 1 October 2021.

Deputy governor and general manager for financial stability, Geoff Bascand, explained: “We are particularly concerned about those who have borrowed in the past 12 months at high LVRs and high DTIs.”

He highlighted the risk posed to borrowers facing negative equity should house prices fall and interest rates rise.

“We’ve already made adjustments to LVR restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending,” he added.

The RBNZ signed an updated memorandum of understanding on macro-prudential policy with the Minister of Finance in June in order to add debt serviceability restrictions to the list of levers that are available to the RBNZ to pull. This was done on the condition that they be “designed to avoid impact, as much as possible, to first home buyers”.

Mr Bascand said the central bank also now intends to consult on implementing DTI restrictions and/or interest rate floors in October of this year, in an effort to “provide further comfort that borrowing is sustainable”.

“Introducing DTIs will take longer, whereas the banking industry has informed us that interest rate floors could be implemented more quickly,” Mr Bascand stated.

“Consultation will be focused on operational feasibility and possible calibration of these tools, including their impacts on investors and first home buyers.”

‘We expect banks to take heed’: RBNZ governor

The RBNZ governor, Adrian Orr, added: “We expect banks operating in New Zealand to take heed of our signal to consult on the tightening of lending standards – both LVRs and debt-servicing criteria. They must make their lending decisions with the best long-term interests of the borrower in mind. 

“At Te Pūtea Matua, we are also making the decisions with the long-term interests of New Zealand’s economic wellbeing in mind,” he said.

Mr Orr acknowledged that one of the drivers of high house prices in New Zealand at the moment was low interest rates, brought about by a significantly reduced official cash rate (OCR) – currently 0.25 per cent – to help boost cash flows and keep business afloat following the economic shock caused by the COVID-19 pandemic.

He added that the Reserve Bank’s monetary policy committee “needs to think about when and how we would return interest rates to more normal levels, which are neither unnecessarily giving the economy a push forward nor holding it back”. 

The governor suggested these will likely be addressed following the monetary policy statement on 18 August.

“Our monetary policy tools (especially the OCR and our financial stability tools) need to be mutually supportive,” Mr Orr said.

“We need to continuously position the OCR to meet our monetary policy goals, and use our financial stability tools to best ensure that borrowers and lenders are financially capable and savvy enough to manage through the interest rate cycles. 

“This is how the Reserve Bank best contributes to the economic wellbeing of all New Zealanders,” he concluded.

Australia unlikely to follow suit

While Australian house prices have also been rapidly rising since the COVID-19 pandemic first hit (rising by 16.1 per cent in the 12 months to July, according to CoreLogic), the Reserve Bank of Australia has suggested that it would be unlikely to follow suit in bringing in similar changes.

Speaking in December, RBA governor Philip Lowe told Parliament that Australia does not have “the same tradition” of high LVR loans, and that the banks and borrowers here are fairly cautious to high debt.

In this month’s monetary policy statement, Mr Lowe added that it would continue to assess mortgage borrowing “carefully”.

After confirming that Australia’s cash rate would remain at 0.10 per cent, he said: “Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first home buyers. There has also been increased borrowing by investors.

“Given the environment of rising housing prices and low interest rates, the bank is monitoring trends in housing borrowing carefully, and it is important that lending standards are maintained.”

[Related: APRA’s lending macro policy worked: RBA]