Lending curbs expected to bite

Reserve Bank Governor Graeme Wheeler's new home loan restrictions on banks will give him time to pause. Photo / Mark Mitchell

Compliance conditions mean bank boards will take cautious view of restrictions, says association.

The curbs on low-deposit home lending announced by the Reserve Bank yesterday are likely to prove more restrictive than it thinks, the Bankers Association warns.

Governor Graeme Wheeler said under the new regime, to come into effect on October 1, only 10 per cent of the value of banks' new lending could be on loan-to-value ratios (LVRs) of more than 80 per cent.

However, some loans would not count towards this speed limit, including Housing NZ guaranteed Welcome Home loans, bridging loans, refinancing of existing loans and high-LVR loans to borrowers moving home but not increasing their loans.

Allowing for those exemptions the Reserve Bank estimates its 10 per cent speed limit would effectively limit banks' high LVR lending to about 15 per cent of new residential lending. That would be about half the rate reached in recent months.

But the Bankers Association's regulatory director, Karen Scott-Howman, said the Reserve Bank was making compliance with the LVR restrictions a condition of registration as a bank.

"And that will necessarily mean bank boards will take a cautious view of those restrictions, because the implications of breaching a condition of registration are just too serious not to put a buffer in place."

It is up to individual banks how and to whom they allocate the available credit within the LVR limit.

Kiwibank's chief executive Paul Brock said it would give priority to first-home buyers over those buying investment properties.

As the Reserve Bank indicated last week the major banks will initially have to comply with the restriction on average over the first six months of the new regime and thereafter on a rolling three-month basis. That transitional grace period is to give them the ability to honour loan pre-approvals which typically are good for six months and which in some cases might otherwise have pushed a bank over the limit.

Wheeler said banks were expected to respect the spirit and intent of the restrictions and not offer lending products designed to avoid or undermine them.

In a speech at the University of Otago he said his main concern was the rate at which house prices were rising and the risk that posed to the financial system and the broader economy, particularly as they were rising from a starting point widely considered over-valued.

"Rising house prices in Auckland and Christchurch are mainly the result of supply shortages, although demand-side pressures are also a factor due to pent-up demand, the lowest mortgage rates in 50 years, and aggressive competition among banks for new borrowers, including borrowers with low deposits," he said.

"The conventional mechanism to help restrain housing demand while working on the supply response would be to raise the official cash rate, which would feed through directly into higher mortgage rates. However, while higher policy rates may well be needed next year as expanding domestic demand starts to generate overall inflation pressures, this is not the case at present."

While house price inflation is running at double-digit rates in Auckland and Christchurch, consumers price index inflation is below 1 per cent, the bottom of the bank's target band.

"Furthermore, with policy rates remaining very low in the major economies, and falling in Australia, any OCR increases in the near term would risk causing the New Zealand dollar to appreciate sharply, putting further pressure on New Zealand's export and import competing industries," Wheeler said.