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The Reserve Bank (RBNZ) has confirmed that caps on sub-prime real estate loans are officially on the way back, but it doesn’t expect them to have much of an impact on house prices.
The absence of LVR has been attributed in part to rising house prices.
Photo: RNZ / Richard Tindiller
Consultations on the reimposition of loan-to-value (LVR) ratios have started from March next year.
RBNZ Lieutenant Governor Geoff Bascand said the economy and housing market had recovered more than expected and the number of riskier loans had increased.
“Lending to higher LVRs has increased, especially for investors, and there are signs that this trend is accelerating.”
“The Reserve Bank is concerned that increases in highly leveraged loans, if they continue, could lead to emerging risks to financial stability.”
LVRs were suspended in April as part of a series of measures to support the economy and households when Covid-19 arrived.
They were supposed to be on hold for at least a year, but their absence has been attributed in part to rising house prices and exacerbating the difficulty for potential home buyers to afford property.
The RBNZ said LVRs would be at previous levels, with retail banks capped at no more than 20 percent of new owner-occupant loans with less than 20 percent deposit, and no more than 5 percent of new loans to investors with less than a 30 percent deposit.
The consultation process is largely academic given that all major retail banks have already reset LVR limits in anticipation of the RBNZ move.
The RBNZ has always maintained that LVR restrictions are intended to ensure that retail banks are financially sound and not a means to cool home prices or improve housing availability or affordability.
“By putting caps on subprime loans, LVR restrictions help make household and bank balance sheets more resistant to a property value correction if it occurs,” Bascand said.
In its consultation paper, the RBNZ said it did not expect the reimposition of LVRs to have much of an impact on house prices.
“We consider that a reasonable estimate of the impact on house prices of reinstating LVR restrictions on March 1, 2021 would be a reduction in house prices of 1-2 percentage points.”
“However, as housing markets may suffer from ‘irrational exuberance’, LVR restrictions should help support a possible further acceleration.
The RBNZ said it was also looking at the possibility of debt-to-income ratios (DTIs), which would link loans to a borrower’s income. A previous national government rejected an offer from RBNZ in 2016.
Last month, RBNZ Governor Adrian Orr said the central bank would have DTI in its toolbox for possible future use.
