The Reserve Bank (RBNZ) has clarified loan-to-value ratio (LVR) restrictions are here to stay, and won’t be completely removed if debt-to-income (DTI) restrictions are introduced.
In other words, the RBNZ won’t ditch the type of restrictions it’s currently using to regulate banks’ mortgage lending if it starts applying new types of restrictions, aimed at strengthening the financial system in a different way.
Sure, the RBNZ might ease LVRs if it introduces DTIs, but it isn’t planning to remove LVRs altogether. In fact, it sees LVRs as a “permanent device to maintain resilience of the financial system”.
The RBNZ also plans to start publishing projections for how it sees itself applying these macroprudential tools.
These were key messages RBNZ Deputy Governor Christian Hawkesby delivered in a speech on Thursday morning.
LVRs and DTIs complimentary
His comments follow the RBNZ on Wednesday announcing plans to work with banks to get ready to start implementing DTIs by mid-2023 “if required”.
With a number of factors seeing the housing market turn, and credit conditions tighten, the RBNZ signalled it would take a cautious approach towards potentially implementing the new type of restriction.
DTIs would limit the amount of mortgage lending banks could provide to borrowers seeking a lot of debt relative to their incomes.
The LVR restrictions currently in place require borrowers to have certain sized deposits relative to the debt they’re seeking.
While some banks argue it would essentially be an overkill for the RBNZ to apply LVRs and DTIs at the same time, Hawkesby said the tools were “complimentary”.
“LVR restrictions help us manage the loss given default in a period of widespread default on mortgage lending,” he said.
“Including a debt-to-income measure in our toolkit would help with reducing the probability of default.
“Therefore, these two policy tools deal with different sources of risk: LVRs with the risk to banks from a fall in house prices, and DTIs with the risk to households from a fall in income.
“We see reducing the probability of default and loss given default as two complementary policies in creating a more resilient financial system.”
Interest rate floors could still be set
The RBNZ on Wednesday also said it wouldn’t follow through with its proposal to set interest rate floors as an interim measure while establishing a DTI regime.
The regulator deemed it unnecessary for it to set a minimum interest rate for banks to test mortgage applicants at, as it noted banks’ test rates have started rising in line with market rates, and the RBNZ expects to see a slowdown in lending to borrowers taking out a lot of debt relative to their incomes.
Nonetheless, Hawkesby in his speech, underlined the benefit of the RBNZ being able to introduce such restrictions if required.
He said the RBNZ believed it was “important to have a fuller suite of macroprudential tools, which help manage both the risks to the financial system from a fall in house prices and the risks to households being unable to service their debt”.
Putting macroprudential policy on an ‘equal analytical footing with monetary policy’
So, as the RBNZ looks to use more tools to ensure the financial system as a whole is stable and efficient, Hawkesby said it has to enhance the way it communicates.
He said public understanding and support of its actions are key to the regulator maintaining its “social licence” to operate.
He said the RBNZ would need to explain whether its macroprudential settings are contractionary or expansionary, and outline “how they combine in total to a neutral long-term setting to support financial stability through the cycle”.
Hawkesby said the RBNZ should also aspire to publish projections of its macroprudential settings, like it publishes projections for where it sees the Official Cash Rate going on the monetary policy side of things.
“All of these considerations are part of the building blocks we need to put macroprudential policy on an equal analytical footing with monetary policy, and to find the rhythm of following a consistent, repeatable process backed by clear and transparent communication,” Hawkesby concluded.
The RBNZ will have more to say on these issues when it releases its Financial Stability Report on May 4.
29 Comments
We have always indicated that the LVR restrictions are a temporary measure
https://www.nzherald.co.nz/business/lvr-restrictions-to-remain-rbnz/J46…
RBNZ have been lying to the public for a decade on this stuff so it's nice to finally see some honesty. There is no central bank on the planet that ever rolls back regulation of its own accord once it's in place. One day there will be a braver government which will remove some of these powers that shouldn't exist at all. Since they were brought in house prices in Wellington have tripled - they've done nothing to stop house price inflation but have succeeded in locking out hundreds of thousands of New Zealanders from access to the housing market.
Who are they gaslighting with this "LVRs are a permanent device to maintain resilience of the financial system" BS?
They removed LVRs when they were needed the most, and blew the rear end right off our financial system.
People don't seem to realize yet just how farked our financial system is, now that rates are rising. The horse has already left the stable.
Worst. Central. Bank. Ever.
Yeah I agree - possible the worst financial situation/economy in the last 100 years. I think the Fed are praying for a deflationary impulse from somewhere so they can keep printing....but that will only make the situation even worse down track.
To save their currency, they may need to collapse asset prices. Or to prevent debt defaults, they made need to completely destroy their currency to the point that it becomes a joke and nobody wants to operate in USD any longer.
There is nothing wrong with LVRs but I lament the never ending introduction of new rules by RB and Governments and the resulting of the inexorable erosion of people's freedom. The many rules enforced upon us every year to "protect us", are designed to save the dumbest amongst us and the other 99% of reasonbable people pay for that one person's irresponsible action by losing their freedoms.
I came to NZ 28 years ago from Switzerland, a country with 2'000 years of history, 2'000 years of Governments introducing new restrictions to protect their citizens. Back then I loved the freedom available in NZ. I remember walking on a track by Qtown, it became so steep, there was a rope anchored into the rock, and I thought to myself. I could die if I fall here, this would never be allowed in Switzerland. I also clearly remember this track to this day, for its amazing beauty, and I know that this track has been closed many years ago.
The building code fitted in one volume of a printed folder whereas now... well it's online but it must be about ten times as long , restrictive and complicated.
Personally I really regret the never-ending erosion of our freedoms, the dumming down of society, we are all forced to become very "beige"
Query the building code comment Yvil - would you rather NZ continued its shameful building standards and kept building drivel and charging horrid amounts for it to only leak, grow mouldy and fall down? Over or unnecessary regulation weakens necessary laws but where life and living depend on it, can you really defend deregulation of the building sector? History disagrees with you.
The building code seems now most about council and government trying to reduce taxpayer exposure to industry failure. In the 80s industry said it could self govern and take responsibility for outcomes, but it proved unable to do either, and it has cost ratepayers and taxpayers and absolute bomb - $50 billion and counting.
It would be preferable to have less regulation and more freedom, perhaps with a backstop of industry insurance, but the industry is now unable to be underwritten.
However, yes, hopefully we can embrace more freedom. Good to see the bipartisan accord to increase people's freedom to build on their own land, for example. Hopefully authoritarian NIMBYs do not get to prevent this liberalisation and enlargement of freedoms.
NZD to USD = $0.653
Given inflation, if the NZ Dollars continues its downward trajectory it'll start looking like a garbage currency.
Investors might hope the NZD pops back up, however at these levels investors might just cut their losses and reallocate their capital - putting more downward pressure on the NZD.
The government, RBNZ, media and general population still don't get it - Inflation is here and its desire is for ALL of us !!
The aforementioned have the hubris to think they understand and can navigate inflation - they will fail.
Agree ZB I still can't see any other outcome despite the constant stream of economists saying the nz dollar should appreciate. It baffles me where they see the value , I see it as a basket case, inflation will be higher than predicted and last for longer than they predict. In the 70s and 80s it took over a decade to control with much more aggressive policies than currently being implemented. While the world's troubles over resources are getting worse and can only continue to do so .
They only difference now is the size of the debt relative to income/GDP....trying to repeat Reagan/Volcker will cause widespread debt defaults/unemployment....depression style environment. We could rapidly turn into a deflationary environment if/when the debt defaults start rippling through the economy.
I agree that the ruling elite, media, and sheeple don't really understand inflation. The ruling elite is still attached to the dogma (if you don't buy into the dogma, you can't really be in the ruling elite). The media's primary role is to communicate the narrative from the ruling elite to the sheeple. And unfortunately, the sheeple generally accept what they are told.
You can see how Robbo is trying to control the narrative by pointing the finger outside NZ. Out of his control you see. His hands are tied and there's little he can do. As the story goes.
Sit back and enjoy the show.
Is it not a fact that Robbo attributes inflation to supply chain shocks and energy costs? Is it also not a fact that he told the sheeple that he cannot conclude that QE causes inequality?
You might want to look to the ruling elite if you want to understand what patronising is.
Who exactly is the ruling elite - monarchy? House of Lords? Robertson was elected by our democratic process.
You think he controls the narrative and the media do his bidding? HDA and MH hold down the two most listened to daily radio broadcasts and would disagree with you as would many of the articles on this media outlet!
Has he mis managed the economy - absolutely. Housing and inflation are on his watch.
Even worse is the democratic party in the US calling it Putin's inflation! That sounds like Trump calling it the China Virus....both as bad as one another.
Politicians need to grow a pair and take ownership for their actions and the consequences of those actions as opposed to blaming everyone else for their problems.
I don't agree with the comment:
"The LVR restrictions currently in place require borrowers to have certain sized deposits relative to the debt they’re seeking."
My understanding is that LVR restrictions only influence the BANKS allocation of loans with lesser deposits. If the bank thinks a borrower is good for it, and they have yet to reach their restriction percentage, they will loan at 10%, 5% or even 0% deposit (although that is far less likely now, given the CCCFA changes).
Whereas DTI is directly affected by the BORROWERS circumstances and not the LVR restrictions the bank works under.
A bank might only have 2% of it's total mortgage value be attributed to low LVR loans, well below the current restriction, but they can still refuse to loan to a borrower if their DTI is too high.
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