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The loan-to-value restrictions will be restored next year, as both the Reserve Bank and the government blame who should do more to curb the rise in house prices.
The Reserve Bank (RBNZ) made the announcement on loan-to-value restrictions (LVR) in its Financial Stability Report (FSR) on Wednesday morning.
In its report, the bank stated that real estate and market activity had recovered strongly despite a correction earlier in the year.
“A growing part of these loans is intended for borrowers with low deposits, which makes the balances of these borrowers more vulnerable to a correction.
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“If this trend continues, the stock of low-deposit mortgage loans on the banks’ books would gradually increase to a level that would constitute a risk to financial stability.”
To counter this, the RBNZ will bring back the LVR restrictions in early 2021. It predicted that the measure would heavily affect real estate investors rather than owner-occupiers, as most of the loans granted to the latter they were still performed within the previous “LVR speed limits”.
“The Reserve Bank intends to restore the LVR speed limits to the same level at which they were set prior to their removal in April this year.
RNZ
The Reserve Bank is under attack for fueling the house price bonfire with its latest move to boost the economy, but its advocates say it is not the bank’s job to control the housing market.
“That is, no more than 20 percent of new owner-occupant loans at LVR above 80%, and no more than 5% of new investor loans at LVR above 70%, after exemptions.”
The report also notes that the economic stresses from Covid-19 have not appeared on bank balance sheets, but the report predicts that they will as government support schemes are scaled down and deferral schemes end.
Governor Adrian Orr is expected to hold a press conference later in the morning on the report.
‘Vulnerable’ commercial real estate sector
The commercial property sector typically suffers heavy losses during economic downturns, but now there was more uncertainty about what office and retail demand would look like after the pandemic.
Loans to commercial property clients account for about 8 percent of all loans within the banking system.
As people work from home, the change in working and shopping patterns may be permanent. Which means that the risks for banks exposed to this sector were “skewed to the downside”.
It would occupy top-tier office space in the Auckland market, but demand for “secondary office properties” could decline.
Businesses may look to cut back on floor space and move their remaining office operations to higher-quality buildings.
“Industry contacts have reported significant subletting activity at the Auckland and Wellington offices in recent months, suggesting that this shift is already underway.”
The fiscal and monetary response pays off
A record economic contraction in June could have turned out worse without the combined responses of economic and fiscal stimulus, the RBNZ said.
Eight percent of mortgages were deferred immediately after the pandemic, but the RBNZ noted that only 1.5 percent of mortgages were still deferred.
The bank noted that the corporate sector had also been more resilient than expected to the record economic downturn.
Robert Kitchin / Things
RBNZ says the rapid rise in house prices carries a long-term risk to financial stability.
The bank noted that the situation could have been worse without fiscal, monetary and health responses from both the government and the Central Bank of New Zealand itself.
The banks themselves were well placed to weather the storm. Dividend payments were restricted, but they were still making reasonable profits, which meant they had enough capital to cope with a significant deterioration in economic conditions.
“The largest exposure of the New Zealand financial system is to households, mainly through mortgages.
“Rising home price inflation in recent months mitigates short-term financial stability pressures, but contributes to long-term financial stability risks.”
RBNZ under pressure on the housing
Under pressure from a public concerned about rapid increases in house prices, the RBNZ announced in November that it would consult on the reinstatement of LVRs next year.
Indices retain the amount of money loaned by banks by requiring them to take larger deposits from borrowers.
When LVR restrictions were imposed in 2013, meant that no more than 10 percent of new bank loans could give people with deposits of less than 20 percent.
In a letter to Orr’s finance minister, Grant Robertson, he asked him to take home prices into account when making monetary policy decisions, such as setting the official cash rate.
However, critics have argued that the RBNZ is simply using standard economic tools to prevent deflation in the wake of the pandemic.
Preventing the bank from using them would not change the affordability of the home and could cause other financial problems.
While reducing the amount of new cash flowing into the economy could change a home’s tag price, they argue that it would not change how affordable the home was relative to income and other assets.
Housing is unaffordable because there are not enough houses. And to change this housing supply it would be necessary to increase, an area for which the central and local governments are responsible.
MORE TO COME
