Brian Fallow

The Economics Editor of the NZ Herald

Loan restrictions won't slow building: Reserve Bank

Bank governor says house starts are growing, and high-LVR loans for builds only a small part of new lending.

Graeme Wheeler says it is too soon to assess the impact of the LVR curbs on house inflation. Photo / Mark Mitchell
Graeme Wheeler says it is too soon to assess the impact of the LVR curbs on house inflation. Photo / Mark Mitchell

The Reserve Bank doubts its curbs on mortgage lending at high loan-to-value ratios will have a material counter-productive effect on house building.

Builders have complained that the central bank's moves to halve the amount of lending banks do at LVRs above 80 per cent have had a chilling effect on demand for new builds, undermining the widely acknowledged need to boost the supply side of the housing market.

But governor Graeme Wheeler, releasing the bank's six-monthly financial stability report yesterday, said: "We will keep monitoring the situation but it is a very small percentage of new lending and housing starts are growing strongly."

High LVR loans to fund new housing represented only 2 or 3 per cent of new lending.

Prices of existing houses in Auckland and Christchurch were running ahead of the cost of new builds, he said, and building consent issuance was climbing and already 50 per cent above its level at the trough in 2011.

Wheeler said it was too soon to assess the impact of the LVR curbs on house-price inflation.

The early evidence, six weeks since the curbs came into effect, was that banks had significantly reduced high LVR lending approvals.

But they were still working through the pipeline of approvals extended before the curbs started.

Pricing differentials between interest rates for high and low LVR loans had emerged of about 50 basis points, deputy governor Grant Spencer said.

ASB economist Daniel Smith said that while there were many anecdotes of a drop-off in the number of buyers in the market and lower sales volumes, data for October suggested sales volumes were largely unchanged from September. ASB's seasonally adjusted estimate of the change in turnover between September and October was just -0.2 per cent.

The Reserve Bank has estimated that the LVR curbs will shave about 30 basis points off the extent to which it will need to raise interest rates over the next year.

But it reiterated yesterday that current financial market pricing would still imply mortgage rates climbing to about 7 to 8 per cent within the next two to three years.

Longer-term fixed mortgage rates have already risen.

Even in an environment when mortgage rates are at multi-decade lows, debt-servicing costs - interest and principal - are around 14 per cent of disposable income. While that is down from a peak of over 16 per cent in 2008 it remains high by standards of the past 30 years.

The increasing share of high LVR lending over the past 18 months, combined with the high level of household debt (relative to incomes) could make the financial system more vulnerable to a rise in interest rates, the bank said, particularly if borrowers had not allowed for interest rate increases in their financial planning.

For a representative new entrant to the housing market it forecasts the debt-servicing ratio to climb from about 34 per cent of disposable income now to around 43 per cent.

Westpac economist Michael Gordon said that while the Reserve Bank gave no indication that it was exploring the use of limits on debt-servicing ratios as a macroprudential tool, he would not be surprised if the issue comes up in the future.

Several other countries that imposed LVR limits had also resorted to debt-servicing ratio limits in recent years, he said, including South Korea, Canada and most recently Israel.

- NZ Herald

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