RBNZ: What would have happened without LVRs?

Loan-to-value restrictions have moderated house price inflation and credit growth in the six months since they were implemented, the Reserve Bank says.It has released a report today, using a counterfactual analysis to determine how the LVR rules have affected the housing market.

The counterfactual scenario is a description of what could have happened in the absence of the LVR restrictions, over the same period.

In the report, author Gael Price says that since banks have been limited to no more than 10% of their new lending to low-deposit borrowers, house price inflation has declined and credit growth has stabilised.

Price said the point of the analysis was to determine how much of that was due to the LVR rules, and how much was affected by other factors.

“An estimated counterfactual scenario suggests that, in the absence of the LVR policy or any other housing-specific shocks, house price inflation could have been 3.3 percentage points higher and household credit growth could have been 0.9 percentage points higher (on an annual basis to March 2014). The LVR restriction is the most likely explanation for that result.”

The report shows that the market started to weaken compared to the counterfactual scenario as soon as the rules were implemented. Activity declined, with house sales and mortgage approvals fell significantly below the counterfactual scenario, and days to sell increased.

Price wrote: “House price inflation declined below the counterfactual scenario, although not significantly – as at March 2014, annual house price inflation was 3.3% below the counterfactual scenario. Annual household credit growth fell modestly below the counterfactual scenario, reaching 0.9% below by March 2014, while housing-related credit growth also declined below the counterfactual scenario. Residential building consents rose above the counterfactual scenario.”

The fall in house sales was larger than had been estimated, which Price said could have been because of a rapid reaction from market participants. Banks started to cut back on their high-LVR lending before they were required to.

“It is possible that house sales may recover as the market adjusts to the new policy regime, especially if banks make more use of exemptions, as was initially expected.”

Price said house prices had not declined significantly, possibly partly because the rules were skewing the composition of sales, making house prices appear higher than they otherwise would.

Household credit growth had responded  slowly to the weaker housing market, partly because there is a lag of several months between the sale of a house and the corresponding housing loan being drawn down.

Price said credit growth was likely to fall further below the counterfactual scenario in coming months, based on the decline in activity already seen.