The Reserve Bank says risks to New Zealand’s financial system have eased over the past six months and it is time to reduce restrictions on mortgage lending.
Loan-to-value restrictions (LVRs), set by the Reserve Bank, determine what proportion of new lending can go to people with small deposits.
From January 1, up to 20 per cent of new loans will be allowed to be to owner-occupier borrowers with equity of less than 20 per cent.
At present, only 15 per cent of new lending can be to this group. Before the rules were first introduced in 2013, lending to low-deposit borrowers was about 30 per cent of bank business.
Up to 5 per cent of new lending will be allowed to be to investors with deposits of less than 30 per cent. At present the threshold is 35 per cent.
Reserve Bank governor Adrian Orr said households were still exposed to financial shocks, due to their large mortgage debt burden.
“However, both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending. In response, we are easing our LVR restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained we expect to further ease LVR restrictions over the next few years,” he said.
The rules have been credited with taking the heat out of the Auckland property market, particularly in relation to investor activity.
The Reserve Bank says risks to New Zealand’s financial system have eased over the past six months.
ASB chief economist Nick Tuffley said the move was more than he had predicted.
It would provide more stimulus to the market at a time where it was already buoyed by low interest rates, he said, and had shown signs of a late spring bounce.
“It should reinforce activity.”
Infometrics economist Gareth Kiernan said the relaxation for investors was a surprise. At 30 per cent, that is the same level of deposit required from investors as in 2015, when the rules seen to have little impact on investor activity.
But he said the Reserve Bank might assume that it could safely make the downward adjustment now without sparking the market back into life, because the “speculative heat” had been taken out over recent years.
The rules were first introduced in 2013 and have been tweaked many times since.
Real Estate Institute (REINZ) chief executive Bindi Norwell welcomed the change.
“The fact that banks have the opportunity to increase the percentage of new lending from 15 per cent to 20 per cent of their total loan book means there is a chance for more first-time buyers to have access to lending that they haven’t previously had.
“We continually hear feedback from real estate agents around the country that with median prices rising to record levels in the regions that first-time buyers are just finding it too difficult save that deposit to purchase their first home and to get into the property market. Any window of opportunity for young couples to get a foot on the property market is to be welcomed,” she said.
“We also welcome the news that LVRs for investors have been relaxed from 35 per cent to 30 per cent as with the raft of legislation currently facing investors, many have announced their intention to exit the market. Today’s announcement may go some way to supporting the continued supply of rental properties across New Zealand.”
Kelvin Davidson, senior research analyst at CoreLogic, said the move could kick-start sales volumes, but it was not guaranteed.
“Despite the Reserve Bank’s loosening of LVR limits, an increase in lending is not a clear-cut outcome. After all, lenders may choose to continue on their cautious path, especially since today’s Financial Stability Report also highlighted the RBNZ’s view that ‘higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient’. In other words, a requirement in future for the banks to hold higher capital buffers would tend to dampen lending flows.”
BETTER MORTGAGE RATES?
At the moment, banks offer their “special” home loan interest rates to people with equity of 20 per cent and more. They have dipped below 4 per cent in recent weeks.
Buyers without 20 per cent not only miss out on the specials but also pay low-equity margins and premiums on top of standard rates.
Broker Bruce Patten said this month that someone with 20 per cent equity could get a rate around 4 per cent but a borrower with a 10 per cent deposit could pay about 5.5 per cent.
Banking expert Claire Matthews, from Massey University, said it was possible that banks could start to extend their specials to people with less equity.
The competition happening in the home loan market indicated they wanted to lend, she said.
“They’ll be able to do more lending to those people and may possibly be willing to encourage them more than they were in the past. On the other hand the reality is people with smaller deposits are more risky and it makes sense that they should be charged a higher rate. It depends on how willing they are to lend. If one moves then they others probably will because they can’t afford not to.”