RBNZ may signal increase to low equity mortgage lending 'speed limit' tomorrow
Posted in Property November 11, 2014 - 10:00am, Gareth Vaughan
Sourced from interest.co.nz.
The Reserve Bank may signal an increase to its "speed limit" on banks' low equity mortgage lending from 10% to, say, 15% when it issues its bi-annual Financial Stability Report tomorrow, economists from ANZ and ASB say.
Last month Reserve Bank Governor Graeme Wheeler said restrictions on banks high loan-to-value ratio (LVR) residential mortgage lending will be reviewed, along with their implications, in Wednesday’s Financial Stability Report. Deputy Reserve Bank Governor Grant Spencer had previously said the restrictions were more likely to be "phased off" than removed "holus-bolus."
"Net on net we wouldn’t be surprised to see some sort of guidance from the Reserve Bank this week over the relaxation in LVR restrictions. We’re not talking wholesale removal; more likely a gradual relaxation in the threshold (from a 10% cap to say 15% in the first instance). But the life-span and breadth of LVR restrictions is now on borrowed time," ANZ's economists, led by chief economist Cameron Bagrie, say.
"An unwind does look to be around the corner, with appropriate conditionality over the obvious financial stability risks of course still required. That’s a polite way of saying that LVR restrictions will come off, but only if borrowers (and intermediaries/banks) behave themselves.
ASB economists, led by chief economist Nick Tuffley, point out in his speech last month Wheeler said the restrictions “will be removed once housing market pressures have moderated and when we are confident there will not be a resurgence in house price inflation.”
"We think that the Reserve Bank will not have that confidence yet, particularly with the market still very tight going into the busy summer months. However, there is the potential the Reserve Bank will look to lift the restriction on high-LVR lending from the current threshold of 10%," ASB's economists say.
Finance Minister Bill English told Radio NZ the Reserve Bank's hierarchy find themselves in a situation where the interest rate pressure is less than they expected, and house price inflation is a lower than they expected.
Property ANZ ASB RBNZ Bill English Cameron Bagrie Nick Tuffley house price inflation LVRs Financial Stability Report home loans Mortgages OCR
"The Reserve Bank's always said they're a temporary measure it's really just a matter of the way they're going to be relaxed and when that's going to happen," English said.
"There's less pressure to have them now than there was, and I would expect that the bank is looking at the path to the end of LVRs."
Since October 1 last year banks have been required to limit their lending at LVRs above 80% (where borrowers don't have a deposit or equity of at least 20%) to no more than 10% of total new mortgage lending. This 10% limit excludes high LVR loans made under Housing New Zealand’s Welcome Home Loans scheme, the refinancing of existing high-LVR loans, bridging finance or the transfer of existing high-LVR loans between properties, and new residential construction loans.
From 25.1% of total new mortgage commitments (before exemptions) in September 2013, high LVR lending (after exemptions) reached its highest monthly point in September at 7.3% since it was 11.5% in October last year. Including exemptions, September high LVR lending came in at 8.4%, or $359 million of total new commitments of almost $4.3 billion.
Meanwhile, ANZ says the combination of LVR restrictions and four Official Cash Rate hikes has worked so well that the interest rate curve is now very flat.
"If people now migrate in large numbers to low fixed rates (a sub-6% five-year mortgage is now on offer), the Reserve Bank risks losing the policy traction of their primary weapon, namely the OCR, which has its largest impact on floating rates. From a pure tactical perspective, getting the focus back onto the OCR therefore has its attractions," ANZ says.
ANZ's economists also note that given banks have played ball and broadly operated within both the letter and the spirit of the LVR rules, high LVR lending hasn't got near the 10% cap.
"That should give the Reserve Bank some comfort that some relaxation is not going to turn into a lending free-for-all. That said, recent market dynamics bear watching and urge against complacency in regard to housing," ANZ's economists say.
'Hardly sufficient time to making sweeping assessments'
Bagrie and co. note, however, that the LVR restrictions were introduced for good reasons.
"Debt in the household sector remains high despite a period of subdued credit growth, and house prices are clearly overvalued on a range of metrics. That’s a financial stability risk that hasn’t gone away.
"LVR restrictions have only been in for just over a year; that’s hardly sufficient time to making sweeping assessments as to their effectiveness and the disintermediation risks of them remaining in place too long," ANZ's economists say.
Furthermore they're not convinced the risk of house price inflation resurfacing has disappeared, but say introducing the restrictions bought the Reserve Bank time in regards to lifting the OCR.
"The Reserve Bank now has the NZ dollar headed in the right direction; why toy with it? If LVR restrictions mitigated the need for 25-50 basis points of OCR hikes (as Wheeler and Spencer have said), then their removal could see the curve re-price upward by the same. Of course LVR restrictions are very unlikely to come off in one hit, but even a lift in the cap from 10% to 15% could be worth up to 10 basis points. That’s hardly a show stopper currency-wise, but it would reinforce the yield side of the equation," ANZ says.
"On the other hand, while technically an easing in the LVR policy should, all else equal, imply a higher OCR is required, the market may take it to mean that all else is not equal – that the Reserve Bank is now very confident the housing market is under control and the tightening cycle is thus definitively over. Interest rates could actually fall on the news, meaning the Reserve Bank ends up with more easing than they intended."