The RBNZ is currently consulting with banks on the proposed change with the aim of implementing it by June 1.
CoreLogic New Zealand chief economist Kelvin Davidson characterised the regulator’s proposal as more of a “tweak” than a “wholesale change”.
He believed the adjustment would increase demand for home loans, but possibly not by a huge amount.
Indeed, banks are testing prospective mortgage holders at high interest rates of between 8.5 and 9 per cent-plus. This is making it difficult for prospective borrowers to prove to their banks they’d be able to service their debt.
Nonetheless, Davidson believed looser LVR rules, coupled with the fact net inward migration is increasing, would boost demand for mortgages.
The RBNZ’s deputy governor Christian Hawkesby explained LVR rules are designed to protect the stability of the financial system.
He said the current settings (which are relatively tight) are “unnecessarily reducing efficiency”.
Specifically, he believed they were “impeding the provision of credit to some otherwise creditworthy borrowers, which is not proportionate to the level of risk that we see”.
The RBNZ also said that while house prices may continue to fall, the probability of a further large correction has reduced. What’s more, lending conditions have “tightened significantly” as banks’ debt servicing assessments allow for higher interest rates.
Loan Market mortgage broker Bruce Patten believed the RBNZ’s proposed LVR changes would have the greatest impact on first-home buyers.
He said the existing 10 per cent cap on lending to owner-occupiers with small deposits was “just not enough”, especially given banks leave a bit of a buffer to ensure they don’t cross this limit.
Patten said banks have at times completely closed the door to borrowers with deposits of less than 20 per cent, as they’d come near to their caps.
He said it was a matter of “open and closed, open and closed, all the time”, noting a 15 per cent cap would help reduce this fluctuation.
Patten didn’t believe the proposed change would have a huge impact on investors.
He noted house price falls had reduced investors’ equity. Enabling them to have less equity to secure a mortgage would simply make up for this reduction.
Davidson was less sure, saying investor demand for mortgages had typically moved in line with the tightness of LVR restrictions.
He also wondered whether investors would see this as a window of opportunity to take on more debt ahead of the RBNZ possibly imposing new debt serviceability restrictions next year.
Having been empowered by the Government to impose debt-to-income (DTI) restrictions on banks’ mortgage lending, the RBNZ has given banks until April next year to ready their systems for the possible introduction of these rules.
They would limit the amount of lending banks could issue borrowers seeking a lot of debt compared to their incomes. The RBNZ hasn’t said where it would set the limits.
Patten said the RBNZ might ease LVR restrictions if it introduced DTI rules.
However, he couldn’t see the RBNZ doing this while interest rates were high.
Patten noted that currently, borrowers will struggle to secure a lot of debt compared to their incomes anyway, so a limit across all banks wouldn’t change much.
But if mortgage rates fell back to say 4 per cent, people might be able to borrow more, so there could be a greater need for restrictions.
ANZ economists commented on the RBNZ’s proposal to loosen LVR restrictions from a broader economic perspective.
They feared that any increase in the availability of credit could risk interfering with the RBNZ’s fight against inflation, which could see the official cash rate (OCR) go higher.
The housing market is a key channel through which OCR changes take effect, so stimulating the housing market goes against the RBNZ’s efforts to cool inflation, they explained.
ANZ economists said they’d already seen green shoots emerge in the housing market. Accordingly, they revised their house price forecasts, and now see prices falling by 18 per cent, rather than by 22 per cent, from their November 2021 peak.
They said the proposal to loosen LVR restrictions exacerbates the risk of a faster housing market revival.
This said, ANZ economists recognised the RBNZ uses its financial stability tools (like LVRs) separately from the way it uses its monetary policy tools (like the OCR), which are aimed at influencing inflation.
They said it was monetary policy’s job to respond to the consequences of LVR settings, concluding, “It is difficult to quantify the impacts of the proposed LVR changes, given the uncertainty around the outlook for the housing market.
“While banks are currently pretty much filling their high LVR-lending allotments, it’s not a given that the proposal will see banks lend up to the new limit.
“We’ll be watching lending data closely in the coming months to see how much unmet demand for higher LVR lending is being unmet and what the consequences of unleashing it will be.”
