Brian Fallow

The Economics Editor of the NZ Herald

New house loan exemption welcomed

High loan-to-value ratio lending rules not intended to restrict construction of housing, says Reserve Bank.

Grant Spencer.
Grant Spencer.

Builders and bankers have welcomed the Reserve Bank's decision to exempt loans for new builds from its curbs on high loan-to-value ratio (LVR) lending.

Deputy governor Grant Spencer said the bank had been keen to not have exemptions from the regime.

The risk that it would have a perverse effect on the supply side of the housing market had not been raised as an issue during the bank's initial consultations on the regime.

High LVR loans to fund new residential construction represented only about 1 per cent of new lending, he said, and the Reserve Bank had thought that the banks would be able to accommodate it within the 10 per cent "speed limit" it introduced on October 1.

"But after we put the restrictions in place we had the Master Builders talking to us about concerns about orders being cancelled," he said.

"And the banks, I think, were giving the impression that this sort of lending is not a high priority for them in terms of who gets in first in terms of the available 10 per cent."

Construction loans, often with progress payments, were more complex from the banks' point of view.

While it remained uncertain how much of the drop-off in orders and inquiries to builders would persist, the bank thought it should give the exemption "to be on the safe side", Spencer said.

"Because really, we don't want to be restricting supply in any way."

After discussions with the Registered Master Builders Federation and the banks, the Reserve Bank now accepts that high LVR loans fund up to 12 per cent of new residential building - equivalent to around 200 new builds a month - and that is a large enough number to warrant the exemption.

While the Reserve Bank had registered a degree of scepticism publicly, Registered Master Builders Federation chief executive Warwick Quinn said it had always been willing to listen to their concerns.

"We needed to make sure that the data we had was robust," Quinn said.

The bank's decision to exempt was a pragmatic response to the evidence put before it, he said.

Bankers Association chief executive Kirk Hope said: "It is good they have responded in the way they have to a strong evidence-based argument."

But NZIER principal economist Shamubeel Eaqub said the bank had weakened the LVR regime by caving in to the house building sector.

"The more the exemptions, the less effective the policy will be," Eaqub said.

It would encourage people with less equity to build, he said.

"So [the Reserve Bank] may just be directing high LVR lending to new builds. But without solving the issues of land supply and planning constraints, the new rules will do little to fundamentally change affordability of housing."

Spencer agreed that the bank could do nothing about land supply and planning constraints.

But he disagreed that the exemption would weaken the LVR regime.

"If we can avoid deterring supply then that will help our cause, not worsen it, because it will reduce excess demand and help reduce pressure on the housing market, particularly in Auckland," he said.

"We wanted to make sure there was a clear case before making an exemption. And there is."

The exemption applies to loans for homes people have commissioned a builder to build for them.

It does not apply to the much smaller number of properties built by developers "on spec". Exempting them as well would increase the risk of generating distortions in the housing market, in the form of over-building or raising prices, the bank said.

The exemption would also apply to top-ups to a loan arising from construction cost overruns during the build. It would not apply to extensions of existing properties, nor to borrowing for discretionary expenditure, such as furnishings.

Infometrics managing director Gareth Kiernan said there was always some risk when exemptions were made to policies that they would open up loopholes.

"But I don't imagine that will be too much of an issue in this case," Kiernan said.

"And the clear evidence in Auckland, and obviously Christchurch for different reasons, is that the market, has been under-supplied."

- NZ Herald

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