Lending restrictions could prompt flurry of property investors, warns economist

The Reserve Bank will consult on bringing back lending restrictions by March. Photo / Michael Craig

A signal from the Reserve Bank that lending restrictions could be back by March 1 may prompt a flurry of investors trying to buy before the clampdown, a property economist has warned.

But CoreLogic's Kelvin Davidson said it could also see banks clamp down on borrowing ahead of time.

This morning the Reserve Bank surprised the market by announcing plans to consult on bringing back home lending restrictions by March 1.

The central bank has been facing pressure from commentators calling for lending restrictions to be brought back amid an unexpected boom in the housing market.

It had been expected to make an announcement around loan-to-value-ratio restrictions at its six monthly financial stability report on November 25 but pre-empted that with today's statement.

The loan-to-value-ratio restrictions on bank lending were put on hold in May for a year to help encourage the banks to keep lending and ensure they did not prevent mortgage deferrals from going ahead.

But in a statement today, the RBNZ said in December it would consult on reinstating loan-to-value-ratio (LVR) restrictions on high-risk lending with effect from March 1, 2021.

Reserve Bank deputy governor and general manager financial stability Geoff Bascand said circumstances in the lending market had since improved.

"We are now observing rapid growth in higher-risk investor lending. We will consult about reinstating the restrictions we had in place pre-Covid, which limited the amount of high-risk lending that banks could make."

Davidson said the announcement could spur a flurry of investors to buy property ahead of any changes.

"Especially given mortgage rates could go lower in the meantime."

But he said there were also a couple of barriers to that.

"Will they find much to buy because of the tight supply of listings? Also will banks let them have the loans or will they start reining things in now?

"I suspect even with all of those things ... we will see a little bit of a flurry."

But Davidson said that also meant there could be a lull in activity once the restrictions came back in.

"The timing and signalling affects both potential borrowers and banks. That could be partly what the Reserve Bank is trying to do."

Davidson said while it was only a consultation at this point it was a pretty clear signal that a change would be made on March 1.

Davidson said the focus on high risk lending meant it would probably be investor lending restrictions that changed rather than owner-occupier lending restrictions.

"Probably for owner-occupiers there will be no real change."

He said even with the LVRs being taken off most owner-occupiers still needed to have a 20 per cent deposit.

"You can sense the growth in lending has very much been driven by investors who were locked out by the 30 per cent restriction."

Prior to May banks were only allowed to do up to 5 per cent of new lending to investors with a deposit of less than 30 per cent.

Davidson said investors had been taking advantage of the small window of opportunity presented by the LVRs coming off.

"I suspect it is where they will bring back the rules."

But he said exactly what those restrictions might look like had yet to be spelled out and the Reserve Bank could allow banks to lend 10 per cent of their new lending to investors with less than a 30 per cent deposit or they could push up the deposit requirement to 25 per cent.

Under the previous rules it had been pretty tight for low deposit investors as banks wanted to have a 5 per cent buffer which effectively meant no lending was taking place for those with less than a 30 per cent deposit.

For owner-occupiers the banks had kept themselves to around 15 per cent of new lending to low deposit home buyers, 5 per cent below the 20 per cent cap.

Westpac chief economist Dominick Stephens said it took the RBNZ's referral to 'high-risk lending' to mean the new LVRs would focus on property investors.

He said reintroducing the restrictions on March 1 would bring forward the RBNZ's earlier commitment to keep the LVRs off until May 1.

At the same time, the RBNZ has further delayed its plan to require banks to hold more capital until July 2022 (previously July 2021).

"We interpret this combination of announcements as the RBNZ starting to address the widespread concern that its low interest rate policy is boosting house prices more than other parts of the economy.

"The housing market is now booming, and the public has correctly perceived that the main cause is low interest rates. That threatens both financial stability and the RBNZ's social and political license to operate monetary policy."

Dominick said the actions were designed to help by suppressing housing lending and supporting business lending.

"LVRs on property investors might take some of the heat out of the housing market. Meanwhile, capital requirements would be a handbrake mostly on business lending. Delaying their introduction is therefore supportive for business lending."

Bascand said it was further delaying the start of increases in bank capital to allow banks
headroom to respond to the effects of the Covid-19 pandemic and to support the economic recovery.

"Covid-19 has emphasised the importance of buffers in the financial system. The more capital a bank holds, the better it can weather economic storms and meet customer needs during tough times.

"Delaying the implementation of parts of the capital review decisions by a further 12 months strikes the right balance between providing more headroom for banks to support lending now by drawing on their capital buffers, while also ensuring that capital levels lift in the longer term to support financial stability."

Reserve Bank Deputy Governor Geoff Bascand. Photo / Mark Mitchell

Bascand said the RBNZ remained committed to increasing capital requirements in the medium-term to underpin financial stability.

The RBNZ would reconfirm the timing of the changes near the end of 2021 and would consider making further amendments if conditions warranted it.

It will also keep restrictions on bank dividends in place until the end of March or later if required.

The RBNZ put a halt on dividends and redeeming of non-common equity tier 1 capital instruments in April.

It has also told insurers that it expects insurers will only make dividend payments if it is prudent for that insurer to do so having regard to their own stress testing and the elevated risks in the current environment.