Former Economics Editor of the NZ Herald

Bank signals mortgage restrictions

Big four players will have to hold more capital to cover lending above 80 per cent of the value of property.

Reserve Bank Governor Graeme Wheeler says that in the March quarter, house prices were 8 to 9 per cent higher than last year. Photo / Mark Mitchell
Reserve Bank Governor Graeme Wheeler says that in the March quarter, house prices were 8 to 9 per cent higher than last year. Photo / Mark Mitchell

The Reserve Bank has given its strongest signal yet that it intends to restrict mortgage lending at high loan-to-value ratios, to rein in credit growth and house price inflation it already regards as "problematic".

The bank confirmed yesterday that it will increase, from September, how much capital the big four banks have to hold to cover lending at LVRs above 80 per cent.

That raises the permanent baseline from which potential temporary, counter-cyclical restrictions on LVRs would apply.

Such restrictions are one of four "macro-prudential" policy instruments the bank wants to have at its disposal.

There is still some process to go through: the conclusion, expected soon, of a memorandum of understanding with the Government, and a further round of consultation, over the next couple of months, with the banks on data and implementation issues.

But the Reserve Bank said there would be no major changes from the regime it outlined in March.

Lending at LVRs above 80 per cent represents about 20 per cent of the banks' home loan book and about 30 per cent of new lending, of which about a third is over 90 per cent.

Such loans are most prevalent among people buying their first home.

The statement indicates the bank does not favour exemptions for first-home buyers, as are made in some overseas jurisdictions, or attempts to target the regime regionally - that is, on Auckland.

But it remains an open question whether LVR restrictions would take the form of prohibiting any lending above the prescribed level, or imposing a "speed limit" or quota which would limit the amount of such lending banks could undertake.

Underlying this initiative is Reserve Bank concern about the risks to financial stability posed by accelerating house price inflation from a starting point of prices already high relative to incomes.

Governor Graeme Wheeler said that in the March quarter house prices nationwide were 8 to 9 per cent higher than in the same period last year. In Auckland and Christchurch, which account for more than half of house sales, they had risen 13.5 per cent and 10 per cent respectively.

ASB's quarterly survey of housing market sentiment found expectations of house price inflation over the year ahead have hit a new record, exceeding the previous peak in 2003.

That was the start of a housing boom larger than in any other developed country and unlike several northern hemisphere countries the boom was not followed by a bust.

Underpinning the surge in house prices is pent-up demand, supply-side constraints and the lowest mortgage rates in 50 years - which is something Wheeler can do something about but is reluctant to with the dollar as high as it is.

The financial stability report noted that construction firms continue to report difficulties obtaining finance, more so than any other sector.

So while the banks are happy to stoke the demand side of the housing market through lower mortgage rates and high-LVR loans, they are wary of aiding the supply side by filling the gap left by the collapse of finance companies, which were important suppliers of funding to property developers.

The Reserve Bank also said there were signs that the recovery in household savings since the global financial crisis might be stalling.

"Household debt is rising from a level that is already high relative to incomes."

Coupled with increasing demand for credit, that trend would increase banks' need to borrow offshore.

While confidence in global markets had improved, lowering New Zealand banks' funding costs in the process, the international outlook remained fragile and there were likely to be periodic bouts of financial market turbulence and instability, it said.

- NZ Herald

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