LVR restrictions could work: NZPIF

In its Financial Stability Report, the Reserve Bank said that banks had relaxed their credit criteria over the past year.

"Discussions with banks suggest that high loan-to-value ratio (LVR) loans are now beginning to form a significantly larger share of new mortgage lending than has been the case for most of the period since the financial crisis," it said.

"However, with households still relatively indebted and house prices remaining overvalued on some metrics, banks will need to remain alert to the risks associated with a marked acceleration in credit growth to the household sector."

Regulation of LVR levels is one of four instruments that are being looked at to increase economic stability by smoothing credit growth during house price booms.

From 2014, the Reserve Bank will be able to require banks to hold a counter-cyclical capital buffer, which will increase the cost of lending during times of credit growth and cushion lean times.

It can also adjust the core funding ratio, which requires banks to source most of their funding from retail deposit and longer-term wholesale sources.

The Reserve Bank could temporarily raise the risk-weighting attached to particular kinds of loans, such as home loans, so that banks have to hold more capital against them.

NZPIF president Andrew King said in principle, mandating higher levels of equity from borrowers was not a bad idea.

He said it would disproportionately affect first-home buyers but that could be a positive thing.

“It might save them from themselves. At the moment they can borrow a hell of a lot of money and that’s great for the banks but not so good for them. They’re enticed to do that at the moment because of the low interest rate situation.”

He said borrowers with large loans could struggle if interest rates rose.

King said it would be important to carefully analyse how LVR restrictions were to be used, by whom, and when.

“Most of its effect is on home buyers rather than investors but it can stop people getting into trouble. People think ‘if the money is there I might as well take it’.”