Housing loan restrictions a step closer

Deputy governor of the Reserve Bank, Grant Spencer.

Banks get some leeway with tweaks to plan for restraints on low-equity lending.

The Reserve Bank has moved a step closer to curbing the low-equity housing loans that banks can make.

It released its response yesterday to banks' submissions on technical issues the policy would create.

The changes envisaged are minor.

Banks would have a longer transitional period of six months, to reflect the fact that in some cases their existing pipeline of pre-approved loans, which are commonly good for six months, could make compliance within the first three months impossible without breaching those undertakings to would-be borrowers.

Thereafter the larger banks will have to comply with the restrictions on a three-month rolling basis.

Deputy governor Grant Spencer said restrictions on high loan-to-value ratio (LVR) residential mortgages could help dampen excessive house price growth in periods when credit growth was boosting housing demand beyond housing supply.

"In so doing they can reduce the risk of a rapid correction in house prices and the economic and financial instability that would ensue."

An "indicative" illustration the Reserve Bank offers of how the scheme would work is that banks would be required to limit the proportion of loans with LVRs over 80 per cent (or deposits of less than 20 per cent ) to 12 per cent of new lending and LVRs over 90 per cent to 5 per cent of new lending.

As at March 30 a weighted average of 20.5 per cent of the big four banks' residential loan book was at LVRs over 80 per cent, and 7.8 per cent was over 90 per cent, according to the banks' disclosure statements.

The Reserve Bank was non-committal on whether it would go for a two-tiered approach but said its sense of the banks' submissions was that it would be feasible.

It remains opposed to more than a limited number of exemptions.

One exemption, already foreshadowed, would be for Housing New Zealand's Welcome Home mortgage insurance scheme. The Government plans a modest increase in the scheme's funding but borrowers must provide 10 per cent equity.

The bank said it "does not rule out the possibility of targeting restrictions in the future if risks were found to be significantly concentrated in particular segments of the housing market, such as investors".

The Reserve Bank is sticking to its commitment to give the banks "at least two weeks" notice. Some say the new regime could come into effect as soon as September 1, a Sunday.

Others believe the bank is more likely to introduce it at the time of its next financial stability report on November 13, on the grounds that it sees LVR restrictions primarily as a means of strengthening the resilience of the banking system.

The Reserve Bank has also addressed some of the potential ways banks might seek to get around the restrictions. Spencer said banks' management and directors would be expected to follow the spirit and not just the letter of the restrictions.

It has indicated sanctions would apply if banks sought to frustrate the rules by entering into a series of separate transactions to create what in substance was a single residential mortgage transaction, or if they arranged to channel funding to the borrower through a third party to enable the borrower to buy a property with total borrowing which would count as a high LVR loan if it were all provided by the bank.

But the Reserve Bank acknowledged the risk that borrowers would avoid LVR restrictions by borrowing from unregulated sources, undermining the regime's effectiveness.

The risk would be mitigated by making the use of the LVR curbs temporary, it said.

"In addition the current dominance of the banking system in financial intermediation may help to reduce the scope for opportunistic lending by non-bank lenders."