New LVRs safe for banks but won't fix bubble

There is a risk some banks might race to do as much high loan-to-value (LVR) lending to investors as possible before the new rules come into effect on October 1. Photo: Doug Sherring.

A banking expert says new lending restrictions targeting Auckland property investors will make banks' loan books safer but may fail to significantly cool the city's surging housing market.

And there is a risk that some banks might race to do as much high loan-to-value (LVR) lending to investors as possible before the new rules come into effect on October 1, said Massey University's David Tripe.

The Reserve Bank announced this morning that new limits on lending to property investors in the Auckland Council area will require those borrowers to have a deposit of at least 30 per cent from October 1.

The central bank said the danger of a sharp correction occurring in the Auckland market had increased since its November report and investors had been the key source of new demand in the city, accounting for about a third of new lending in the six months ended March 31.

Tripe said the new rules may not have a big impact on price inflation in Auckland's housing market.

"What it will do is make the loans safer and reduce the problems for the banks if the banks if the loans go wrong," Tripe said. "It will have some marginal impact on reining in property prices, but I wouldn't count on it having a huge impact on that."

The Reserve Bank said it would like banks to "abide by the spirit" of the new rules before they come into force.

Tripe said he did not want to "go around naming names", but he suspected some banks will carry on lending "as much as they can" to property investors before the rule change.

In this morning's press conference, the Reserve Bank said previous experience around the introduction of LVR limits for first home buyers, in October 2013, had been positive and banks had not rushed to lend before the rules came into effect.

New Zealand Bankers' Association chief executive Kirk Hope said he did not believe banks would rush to do as much high LVR lending to investors as possible before October 1.

"I think what banks will be wanting to do is understand what the limitations are and ensure they're able to meet those requirements by 1 October," Hope said.

He said the current LVR restrictions had driven property speculation because first home buyers had been shut out of the market, meaning investors faced less competition for properties that came up for sale.

The association was yet to do any analysis on whether lending curbs on property investors would have the desired effect of cooling house price inflation in Auckland, Hope added.

"What they're trying to do is, to the extent that is possible, is dampen demand, which mitigates further price inflation in a way that doesn't create financial instability."

Hope said the association welcomed the Reserve Bank's decision to increase the existing speed limit for high LVR borrowing outside of Auckland from 10 to 15 per cent.

"This is a positive move and recognises the very different housing market conditions outside of Auckland."

A BNZ spokeswoman said the bank looked forward to seeing more detail on the rules and working with the Reserve Bank to ensure policy changes could be efficiently implemented.

"It's difficult to be specific about exact implications at this stage," she said. "Issues like boundary definitions are likely to require a considerable amount of work to get to an efficient and effective solution"

The spokeswoman said a lack of housing supply and strong inward migration were the fundamental issues driving housing affordability in Auckland.

"We support sensible measures that help address the supply problem and the fundamental drivers of the Auckland housing market."

Vince Clark, ASB's head of home lending, said the bank welcomed the Reserve Bank's proposal to ease restrictions on residential lending outside Auckland.

"In Auckland, any initiative to focus on the demand side of the housing equation will need to be combined with measures to address the supply side limitations which remain a key driver of Auckland's housing market," Clark said.

He said ASB would "abide by the spirit" of the new rules before they come into force.