FSR Preview: Will the Reserve Bank loosen LVR restrictions?

Tuesday 27 November 2018

The Reserve Bank will publish its latest Financial Stability Report tomorrow, with all eyes on whether it will loosen LVR restrictions. Some economists "expect" loosening, but others say recent heat in the market could cause the central bank to hold off.

RBNZ deputy governor Geoff Bascand recently revealed the central bank was looking closely at loosening LVR, and the RBNZ has done nothing to dampen the expectation of possible changes as it publishes the FSR.

Loosening would come five years after the introduction of LVR restrictions to cool the market. Rules for owner-occupiers were loosened last year. Currently, only 15% of lending can be made to owner-occupiers with a deposit of less than 20%. While only 5% banks’ lending books can go to investors with a deposit of less than 35%.

Independent economist Michael Reddell expects LVR loosening. He believes the effects will be “small and temporary”. He added: “LVRs don't change the fundamental issue in the housing market: population growth running head-on into land use restrictions.”

Reddell downplayed suggestions LVR loosening was a high risk move in the low interest rate environment: “Interest rates are low for a reason (about overall economic demand being too weak if rates were any higher).  All liberalisations have some risks, but there was never a strong case for these controls in the first place.  Given the pressures on Australian bank lending standards, including from APRA and the Royal Commission, any risks seem less than usual.”

Kiwibank economists are also bullish on the chances of LVR loosening. They “expect” restrictions to be loosened tomorrow, but warn LVR ratios are here to stay. “The levels at which these measures become permanent will most likely be looser than the current settings. So, as an interim step between temporary and permanent, we expect the LVR restrictions to be loosened again.”

Kiwibank economists favour lifting the 15% limit on owner-occupier loans (of more than 80%) to 25%. They also favour lowering deposit requirements for investors from 35% to 30%.

Not everyone is convinced LVR ratios will be loosened. Christina Leung, of NZIER, said the Reserve Bank could wait to see the impact of record low rates on the market before pulling the trigger. Leung added: “It’s a close call but on balance expect the RBNZ will hold off easing this time. There are signs of renewed interest in the housing market, buoyed by the recent drop in mortgage rates. We expect the RBNZ will not want to risk reigniting the housing market by loosening restrictions for now.”

Brad Olsen, an economist at Infometrics, does not believe LVR restrictions will be loosened tomorrow, but expects changes to be flagged for next year. He said: "I’d expect the Reserve Bank will keep the LVR restrictions as they are at tomorrow’s FSR, but will signal a reduction in the LVRs will happen in the May 2019 FSR barring any untoward factors occurring in the housing or credit markets in the next six months.

"Announcing the move now, but implementing it in May 2019, gives a clear signal but also provides the Bank with more time to fully evaluate where the NZ housing market is moving to reduce the risk that a reduced LVR restriction doesn’t stoke a fire under the market."

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