Property investors to be hit with 60% LVR cap

On Tuesday, the Reserve Bank of New Zealand released a 22-page consultation paper in which it warns of “a sharp correction in house prices to be a key risk to the financial system, and one that is increasing the longer the current boom in house prices persists.”

RBNZ governor Graeme Wheeler said New Zealand’s banking system is heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets.

“Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength. The proposed restrictions recognise the higher risks associated with such lending,” he said.

Under the proposed new restrictions:

• No more than 5 per cent of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60 per cent (i.e. a deposit of less than 40 per cent).
• No more than 10 per cent of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80 per cent (i.e. a deposit of less than 20 percent).
• Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

The proposed new restrictions would take effect on September 1 2016 and simplify the LVR policy by removing the current distinction between lending in Auckland and the rest of the country, the RBNZ said.

“The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy. Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority,” Mr Wheeler stated.

“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country. A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.”

The RBNZ governor said LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages.

“This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand,” he said. “We expect banks to observe the spirit of the new restrictions in the lead-up to the new policy taking effect.”

Mr Wheeler concluded that the Bank is progressing its work on potential limits to high debt-to-income ratio lending, which would be a potential complement to LVR restrictions.

“We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential policy to include this instrument.”

Consultation concludes on August 10.

[Analysis: Lending curbs around the world]