Reserve Bank calls for changes to investor LVRs

The Reserve Bank has today released a consultation paper proposing changes to loan-to-value restrictions (LVRs) to further reduce risks to financial stability arising from the current boom in house prices.

“The banking system is heavily exposed to the property market with residential mortgages making up 55% of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength.  The proposed restrictions recognise the higher risks associated with such lending,” Governor Graeme Wheeler said.

Under the proposed new restrictions:

•  No more than 5% of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60% (i.e. a deposit of less than 40%).
• No more than 10% of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80% (i.e. a deposit of less than 20%).
• Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

These proposed new restrictions would take effect on September 1 and simplify the LVR policy by removing the current distinction between lending in Auckland and the rest of the country.

 Wheeler said: “The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy.  Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority.

“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country.  A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.

“LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages. This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand.

“We expect banks to observe the spirit of the new restrictions in the lead-up to the new policy taking effect.”

Consultation ends on August 10.

NZ Property Investors Federation executive officer Andrew King said it would make things tough for new investors. "Record levels of migration, not seen in a century, means there is enormous demand for housing, both owner-occupied and rented. The high demand for rental property in Auckland is not going to be made easier under this policy. Rental prices will continue on an upward trend."

But he said experienced investors would see an opportunity.  "With many smaller investors forced out of the market, this will make it easier for them to buy rentals on favourable terms.

"Consequently, while new entrants to rental property ownership will be disappointed, higher rental prices and lower competition from other investors, matched with high demand from tenants, will mean that experienced and better resourced investors will see this as an opportunity."

Wheeler said that the bank was progressing its work on potential limits to high debt-to-income ratio lending, which would be a potential complement to LVR restrictions.

“We have had positive initial discussions with the Minister of Finance on amending the Memorandum of Understanding on Macro-prudential policy to include this instrument.”