At least 4500 New Zealanders hoping for an end to loan to value restrictions will now have to wait longer before they can buy a place, a financier has calculated.
The Reserve Bank today announced loan to value ratios would continue in an attempt to quell rapid house price inflation and mortgage specialist Bruce Patten of LoanMarket calculated at least 4500 New Zealanders who were poised to buy when the LVRs come off would have been left disappointed by today's announcement.
With about $40 billion of mortgage lending annually throughout New Zealand, Patten said first-home buyers who needed more than an 80 per cent mortgage had been borrowing about $13 billion before October last year when the LVR regime was ushered in.
Now, lending to that category of buyer has dropped to around $4 billion, Patten said.
That means $9 billion which would have been loaned to first-home buyers needing 80 per cent-plus loans was now going to other borrowers including investors, he said.
But he supports LVRs continuing.
"I'm really surprised anyone was expecting they would change it," he said. "If it did change, it would create a potential bubble. There's a lot of people who can't get loans as a result of it. If you put it into perspective, 30 per cent of borrowing was by first-home buyers but now it's about 10 per cent."
Graeme Wheeler, bank governor, released the Financial Stability Report and said housing remained a threat to New Zealand's economy.
"The financial system faces the same key risks that the financial system faced at the time of the May Financial Stability Report, although the balance of these risks has shifted in the past six months.
"The first of these relates to housing market imbalances. Pressures have eased since the introduction of the loan-to-value ratio (LVR) 'speed limit' in October 2013 and subsequent increases in interest rates," Wheeler said.
"We have always indicated that the LVR restrictions are a temporary measure. The reduction in house price inflation and housing credit growth are welcome developments, along with indications of increased residential building. However, there remains a risk of a resurgence in house price inflation, particularly in light of strong immigration flows. Consequently, we do not consider it appropriate to ease the LVR speed limit at this time. The Reserve Bank will continue to closely monitor the housing market," Wheeler said.
Nick Tuffley, ASB chief economist, said LVRs had helped moderate the risk of a sharp correction in house prices during the past year but he is worried about a huge influx of migrants.
"The risk of resurgence in prices is still very real. The key risk we and the Reserve Bank see is net migration, which has yet to peak. Although it could start to show signs of peaking by early 2015, in recent months the net inflow has been very strong. Meanwhile, the Reserve Bank has signalled interest rates are on hold for a period.
That, and low funding costs/strong bank competition, mean mortgage rates are and will remain relatively low. It is possible at present to get lower fixed-term mortgage rates than were available just before the Reserve Bank started lifting the Official Cash Rate. And if you just wanted some anecdotal evidence of interest in house valuations in Auckland, the triennial release of Auckland Council house valuations for local rate purposes triggered a crash in the Council's website. Quotable Value, which opened up its website to access valuations, suffered a similar fate. And, not so much a financial stability risk but an upside inflation risk, the anecdotes of paper-rich Aucklanders looking to "float their boat" on their new-found wealth have materialised," Tuffley said predictions LVRs would come off next year.
" We see 2015 Q2Q-3 as likely timing for the Reserve Bank to ease the restrictions. "Sustainable" price and credit growth is just a matter of time. But a clear downturn in migration would be needed to give a high degree of confidence the housing market won't rebound.
"We don't see house price inflation and mortgage credit growth slowing to 4 per cent until mid-2015. On the net migration front it would take a minimum of several months to confirm a slowing of net migration. If house price and credit growth slowed more rapidly than we expect and migration turned down very soon then Q2 is conceivable," he said.
Even when changes come, they will be gradual.
"We see the most prudent exit as lifting the 10 per cent 'speed limit' to 15 per cent, then potentially 20 per cent before completely removing them. Exiting in a gradual way is a hedge against having the market reignite, while lifting the speed limit is simpler for banks to administer than lifting the 80 per cent LVR threshold to, say, 90 per cent," Tuffley said.
Deputy Governor Grant Spencer said that, while housing risk has reduced, risks in the dairy sector have increased. "The forecast dairy pay out for the coming season has been reduced significantly, and could result in rising loan defaults should the lower pay out level persist.
"Lower global dairy prices are in large part due to reduced demand from China, highlighting New Zealand's vulnerability to a slowdown in the Chinese economy. Risks arise both from New Zealand's large volume of trade with China, and also from any financial market disruption that could arise from a Chinese economic slowdown.
• Landlords bigger borrowers than new buyers
NZ banks well-placed to weather downturn, RBNZ says
New Zealand's banks are strong enough to withstand a sharp downturn, and would be able to stay within regulatory requirements, according to the Reserve Bank.
The central bank, in conjunction with the Australian Prudential Regulation Authority, stress tested New Zealand's banks this year to see how they would stand up under two adverse scenarios, it said in its six-monthly financial stability report.
The first scenario modelled a sharp Chinese slowdown triggering a double-dip recession, leading to shrinking exports and high unemployment, designed to match the experience of some of the more severely affected economies in the 2008 global financial crisis, and the second scenario mapped out a significant increase in interest rates due to a stronger-than-expected recovery followed by disruption to major oil production and the subsequent fall-out.
New Zealand's major Australian-owned lenders had sufficient underlying earnings to face negative profitability in only one year in each scenario, meaning they could conserve their capital levels and stay within regulatory limits. The banks also said they would undertake measures to mitigate risks, such as cutting staff, and reduce discretionary spending, which would help return them to profitability.
"The results of this stress test are reassuring, as they suggest that New Zealand banks would remain resilient, even in the face of a very severe macroeconomic downturn," the central bank said in its report.
Its own testing of five locally-owned banks - Heartland New Zealand, SBS, Cooperative Bank and TSB - assessed their resilience to a large increase in credit losses as a result of a severe domestic recession and big increase in credit losses.
"All participating banks appear to be resilient to a major downturn of this nature, with no bank breaching minimum capital requirements," the bank said.
In its May financial stability report, the bank said it was developing a stress testing framework for local lenders, with the Australian-owned banks already participating in the APRA regime of their parents.
Today's report found the local banking sector was well-capitalised, and had maintained a high level of stable funding to meet the central bank's core funding ratio requirement.
Overseas funding for banks was still seen as a risk to the financial system, though New Zealand lenders' demand for that type of funding had reduced over the past three years due to moderate credit growth and high domestic savings. The reduced reliance on international debt also meant a sharp drop in the New Zealand dollar would be minimal.
Local lenders' net margins were stable, and profitability had improved, though that was seen as being due to the strong local economy rather than a lack of competition.
Non-performing loans declined to 0.9 percent of total lending as at June 30, down from a peak of 2.1 percent in early 2011, and provisioning was at a level close to the mid-2000s. The Reserve Bank expected banks would struggle to improve profitability any further by improving non-performing loans.
Bank lending grew 4.5 percent in the year to September, about the same pace of growth earlier in the year, with consumer credit up 8.3 percent. Agricultural lending was only up 3 percent, led by a 5.8 percent increase in dairy lending, which accounts for almost two-thirds of the sector.
The bank today cited a lower forecast dairy payout as a growing threat to the wider financial system.
- with BusinessDesk