Reserve Bank may loosen mortgage lending curbs

LVR's were introduced in 2013 in a bid to douse an overheated housing market. Photo / File

The Reserve Bank may ease mortgage lending restrictions at next week's financial stability review as credit growth declines and house prices stabilise.

The central bank introduced the loan-to-value restrictions in 2013 in a bid to douse an overheated housing market.

At the time, almost a third of new lending was at a high LVR, heightening risk to the wider sector. It eased those restrictions earlier this year when housing market pressures showed signs of abating.

"When there is no nail to bang you stop swinging the hammer. The Reserve Bank is afforded scope to cut LVR rules by the easing in the housing market," said BNZ chief economist Tony Alexander.

Currently, only 15 per cent of new loans to owner-occupiers can have deposits of less than 20 per cent. Just 5 per cent of loans to property investors can have deposits of less than 35 per cent.

High LVR lending is now at about 9.1 per cent of total lending, Reserve Bank statistics show. House prices have stabilised with the latest Real Estate Institute of New Zealand's index showing national prices rose 3.8 per cent in October from a year earlier.

Mortgage lending has been hovering at an annual growth rate of 6 per cent for the past year. It was 9.1 per cent in September 2016.

In a recent speech, deputy governor Geoff Bascand said the LVR restrictions were introduced to address elevated risks in the housing market.

"We keep LVR settings under regular review. The question we are assessing in the upcoming financial stability report is whether the same restrictions are needed in the current environment," he said.

Westpac Banking Corp senior economist Michael Gordon says the central bank's financial stability concerns have eased and the curbs will probably be loosened.

"The LVR's are no longer having to do all the heavy lifting," he said. According to Gordon, changes to banking practices, the adoption of the responsible lending code, foreign buyer restrictions and the extension of the bright line tax test are also having an impact on the housing market.

Economists who think the RBNZ will ease the curbs agree any moves will be gradual.

A "number of headwinds are acting on the market, including bank prudence, investor wariness and affordability constraints – and these are expected to see the market remain contained. Given this outlook, we expect that the RBNZ will ease loan-to-value ratio restrictions at the November FSR, but continued caution should see settings remain 'tight' for some time," said ANZ Bank New Zealand economists.

The general view is that the speed limit could be lifted to 20 per cent for owner-occupiers and the effective LVR cap on investor lending could increase to 70 per cent.

Not everyone agrees, however.

"We don't think that loan to value restrictions will be eased any further next week. Admittedly, household debt to income ratios have remained stable which would provide scope for an easing. But house price inflation hasn't slowed any further and house prices keep rising at a faster pace than household incomes," said Marcel Thieliant, economist for Capital Economics.

Mortgage rates have fallen in recent weeks which should support the housing market. Meanwhile, the recent slump in dairy prices will weigh on farm incomes and increases the risk of a further increase in defaults in the sector, he added

ASB Bank chief economist Nick Tuffley says it's a line call. The risks to the financial system have reduced further since the RBNZ decided to ease the restrictions a year ago and house price growth is moderating overall.

"There are good reasons for the RBNZ choosing to take its time," Tuffley said, noting that low mortgage rates are already encouraging credit growth. By loosening the restrictions further, the RBNZ could spur on high-risk lending at the same time, he said.