RBNZ consults on mortgage lending limit

The Reserve Bank of New Zealand (RBNZ) or Te Pūtea Matua, has opened a consultation on its proposed restriction on the amount of lending banks can do above a loan-to-value (LVR) of 80 per cent.

The central bank has previously flagged intentions to limit high LVR lending to a tenth of all new loans to owner-occupiers – half of the current 20 per cent limit.

Geoff Bascand, deputy governor and general manager for financial stability at RBNZ commented the central bank’s analysis had found the country’s house prices are above their “sustainable level and the risks of a housing market correction are continuing to rise”.

“The proposed tightening of LVR restrictions will over time help reduce the number of highly leveraged borrowers and help to build resilience in the financial system,” Mr Bascand said.

The consultation is open until 17 September.

RBNZ expects to release its final decision later in the month, along with a regulatory impact assessment and a summary of the submissions received.

It currently intends to implement the new LVR settings from 1 October.

High LVR lending ‘nearly tripled since 2017’

RBNZ already installed LVR restrictions on both owner-occupiers and investors in March in response to a growing amount of high-risk lending to 20 per cent, before it further tightened limits for investors in May.

In addition, the New Zealand government had announced a package of tax policy changes, which included removing interest deductibility on rental properties.

Since the changes were introduced, the volume of new investor lending, as a share of total lending, has declined to below its historical average.

RBNZ noted the downward trend has been especially pronounced for high-LVR investor lending.

But house prices in New Zealand have continued to rise, with the central bank observing a “significant increase” in higher risk loans to owner-occupiers.

“Lending at LVRs greater than 80 per cent has nearly tripled since 2017, with the large majority of this lending going to first-home buyers, followed by existing owner-occupiers,” Mr Bascand said.

“Although our stress testing indicates that the financial system is well-placed to weather shocks such as a downturn in the housing market, we are concerned about the potential future risks to economic and financial stability of allowing this higher risk borrowing to continue at its current rates.”

Across the Tasman Sea, the Reserve Bank of Australia (RBA) has already suggested that it is unlikely to follow suit.

Speaking in December, RBA governor Philip Lowe told Parliament that Australia does not have “the same tradition” of high LVR loans, and that the banks and borrowers here are fairly cautious to high debt.

More recently, Dr Lowe confirmed the Reserve Bank has been watching both the housing and mortgage markets to ensure lending standards are maintained.

Both the RBA and fellow regulator APRA have considered a range of tools they could use if standards fell, which included raising the minimum interest rate that banks use for home loans, as well as potential portfolio restrictions on LVR or debt-to-income (DTI).

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