NZ looks to reinstate LVR restrictions

New Zealand’s central bank has launched a consultation on reinstating loan-to-value ratio (LVR) restrictions to pre-COVID levels as part of a move to protect financial stability.

The Reserve Bank of New Zealand first introduced LVR restrictions in 2013 as a means of protecting the market from over leveraged borrowings. However, as part of its COVID-19 response, the central bank removed the LVR restrictions to eliminate what it viewed as “a possible obstacle to the flow of credit during the economic downturn”, which was triggered by the pandemic.

The removal of the restrictions also sought to avoid an adverse impact on the mortgage deferral scheme implemented in response to the COVID-19 pandemic.

When the decision was announced, in April 2020, RBNA said that the restrictions would be removed for at least 12 months to help support the economy. However, the bank has noted that, since then, the economy has performed better than forecast and the housing market had “proved much more resilient than was originally predicted, with mortgage lending and house prices both rising strongly in recent months after briefly declining during the lockdown period”.

Moreover, RBNZ revealed that it had seen high-LVR loan writing increase “significantly”, particularly for investors, since the moratorium, and that this trend “has been accelerating”. 

According to RBNZ, since the LVR restrictions were removed, the share of new investor lending at LVRs above 70 percent has increased to around 35 percent of total new investor lending from around 15 percent (before exemptions). 

To date, most of the increase in high-LVR lending to investors has been at LVRs from 70 to 80 percent, it added.

Owner-occupier lending remains within the pre-COVID restriction levels, but the share of owner-occupier lending with a debt-to-income (DTI) ratio of greater than 5 rose to 38 percent in September from 30 percent a year ago, the RBNZ said.

As such, the central bank said that the rising levels was of “particular concern from a financial stability perspective”.

“We are concerned that an increase in highly leveraged borrowing, against an uncertain economic backdrop due to COVID-19, is beginning to create risks to financial stability,” the RBNZ said.

“We are therefore consulting on reinstating LVR restrictions on 1 March 2021…

“Reinstating LVR restrictions from 1 March 2021 will give banks time to clear their existing pipelines of high-LVR loans that have been approved but not yet settled.”

The LVR restrictions would therefore return to their pre-COVID levels of:

• a maximum of 20 percent of new lending at LVRs greater than 80 percent for owner occupiers; and
• a maximum of 5 percent of new lending at LVRs greater than 70 percent for investors.

RBNZ added that it expected that new high-LVR lending would decrease before the reinstatement date as banks prepare for the introduction of new restrictions.

The Reserve Bank’s deputy governor and general manager of financial stability, Geoff Bascand, concluded: “The Reserve Bank’s objective when deploying macro-prudential policy instruments such as LVR restrictions is to promote financial stability by building the resilience of the financial system. 

“By placing limits on high-risk lending, LVR restrictions help make household and bank balance sheets more resilient to a correction in property values if it occurs.”

The consultation is open until 22 January 2021.

Australia lacks high LVR loans 'tradition'

Earlier this month, the governor of the Reserve Bank of Australia (RBA), Philip Lowe, was asked by the Standing Committee on Economics whether Australia would follow suit and intervene if it was concerned by house price volatility.

Speaking at the time, Mr Lowe said that while he had been concerned about volatility and the risk of “very large declines” in house prices “earlier in the year”, this was largely when forecasts were looking at the prospect of unemployment reaching over 10 per cent, output falling by 10 per cent and population growth stopping at zero.

Noting that this would have undermined community confidence and “cause problems for the banking system”, he added that he was “not particularly concerned” about housing prices at the moment.

“At the moment, I'm not particularly concerned about housing prices rising too rapidly,” he said, “largely because of the population dynamics… population growth going from 1¾ down to basically zero. That fundamentally changes the dynamics of the market. 

“We'll see pockets that are very strong, but across the country as a whole, with population growth so low, I'm not expecting to see big increases in housing prices.”

He said it was “unlikely” that Australia would see similar issues as New Zealand, given that population growth in New Zealand was fairly strong (given the number of returning New Zealanders) and the fact “there is also in New Zealand a fairly strong tradition of high LVR loans”.

He commented: “There were restrictions on that for a number of years that brought that under control. The restrictions came off and that is now coming back. 

“We don't have the same tradition here. Given the caution of the banks and the change in people's attitudes to debt, I think we're not going to see people rushing the banks to try and borrow 90 or 95 per cent. 

“If they do, then maybe we'll have to have a discussion with APRA, the bank regulator, about whether there should be some controls here,” he added.

[Related: Low population growth to curb house price rise: RBA]