By Bernard Hickey
The Reserve Bank of New Zealand has announced the big four banks will have to hold more capital to back high loan to value ratio (LVR) mortgages - above 80% - from September 30. It expects the changes to start affecting bank behaviour in the mortgage market immediately.
It said it expected the move would force the banks to hold an extra 12% of capital for backing mortgage lending. Later in a news conference, Deputy Governor Grant Spencer said he did not expect the changes would increase interest rates for such high LVR loans by much and he did not expect the banks would have to either retain dividends or raise fresh capital, given they already have significant capital buffers.
The move was signaled in March as part of a review of risk weighted capital requirements for banks after a surge in high loan to value ratio lending over the last year. The bank announced the change in its half yearly Financial Stability Report where it also warned fast-rising house prices were increasing risks to financial stability.
"“Housing pressures are increasing risk in the financial system,” Reserve Bank Governor Graeme Wheeler said.
“House prices relative to disposable incomes are already high by international standards. Further price escalation will worsen the potential damage that could result from a housing downturn following an economic or financial shock," Wheeler said.
The Reserve Bank said the changes to capital rules for high LVR loans would result in an average increase in the capital held for housing of around 12%. Deputy Governor Grant Spencer said the first stage of a review of capital requirements for mortgage lending had been completed. See more on the capital rule review here.
“Looking forward, we want to ensure that bank capital requirements adequately reflect the risks around housing lending and accordingly we are undertaking a housing capital review," Spencer said.
"In the first stage of this review the Bank is increasing the risk weights applying to high LVR housing loans for the four major banks that use their own models as a basis for calculating minimum capital requirements," he said.
“The increase in the risk weights, applying to all current and new high LVR loans for the major banks, will result in an average increase in capital held for housing of around 12 percent and will take effect from 30 September 2013."
Meanwhile, the Reserve Bank said it was close to signing a memorandum of understanding with Finance Minister Bill English for a framework for using macro-prudential tools, which had been foreshadowed for mid-2013.
The bank said it did not envisage major changes to the proposals for the framework it proposed in early March, which included changes to the rules for bank core funding ratios, a counter-cyclical capital buffer, specific capital requirements for lending to certain sectors, and restrictions on high LVR lending.
Spencer said the Reserve Bank would consult further with banks over the next two months to "establish the implementation details of the various instruments so that we are able to use them as necessary."
Full statement below:
RBNZ concerned over growing financial stability risks
While the financial system remains sound, developments in private sector credit and the housing market point to increasing risks to financial stability in New Zealand, Reserve Bank Governor Graeme Wheeler said today, when releasing the Bank’s May 2013 Financial Stability Report.
“Housing pressures are increasing risk in the financial system,” Mr Wheeler said.
“House prices relative to disposable incomes are already high by international standards. Further price escalation will worsen the potential damage that could result from a housing downturn following an economic or financial shock.
“Our concerns are shared by the OECD and by the IMF in its recent review of the New Zealand economy. Housing risks have also been noted recently by all three of the major international credit rating agencies.
“Housing pressures, arising from pent-up demand, limited supply and the lowest interest rates in 50 years are being felt particularly in Auckland and Christchurch, where supply constraints are greatest. Demand is being underpinned by easier credit conditions, both in terms of lower mortgage rates and an increased willingness by banks to lend at high loan-to-value ratios (LVRs).”
Mr Wheeler said a strengthening of global financial market sentiment in recent months is contributing to the easier conditions by reducing bank funding costs and making offshore funding more readily available.
“Global sentiment is also contributing to New Zealand’s overvalued exchange rate, which is continuing to hinder a rebalancing of activity towards the tradables sector that would assist in reducing external vulnerabilities.”
With the credit cycle now turning upwards, there are signs that the post-GFC recovery in household savings may be stalling. Household debt is rising from a level that is already high relative to incomes. Leverage in parts of the agricultural sector also remains high, and borrowing by the sector is increasing at a time when recent drought conditions could expose financial vulnerabilities for some farmers.
“Reflecting our concerns around housing sector developments, the Reserve Bank has been developing a macro-prudential policy framework. We have recently consulted on this framework and will soon be signing a memorandum of understanding with the Minister of Finance to confirm the key elements of the policy, including governance arrangements,” Mr Wheeler said.
Deputy Governor Grant Spencer said that, while housing risks are growing, banks are performing well financially and have strong balance sheets. Their capital levels comfortably meet the new Basel III requirements that took effect in January.
“Looking forward, we want to ensure that bank capital requirements adequately reflect the risks around housing lending and accordingly we are undertaking a housing capital review. In the first stage of this review the Bank is increasing the risk weights applying to high LVR housing loans for the four major banks that use their own models as a basis for calculating minimum capital requirements.
“The increase in the risk weights, applying to all current and new high LVR loans for the major banks, will result in an average increase in capital held for housing of around 12 percent and will take effect from 30 September 2013. “With regard to the new macro-prudential policy, the public consultation has provided useful feedback on the costs and benefits of the proposed framework and on the potential effectiveness of the various instruments. Overall, we do not envisage major changes to the framework proposed in the consultation documents. Over the next two months, we will be consulting further with the banks to establish the implementation details of the various instruments so that we are able to use them as necessary.”
Mr Spencer said that the Reserve Bank is also strengthening regulation in a number of other areas, including OBR pre-positioning, a review of the Bank’s oversight of the payments system and the implementation of a new prudential regime for the insurance sector.
(Updated with comments from new conference)
32 Comments
Well, that's a regulatory failure of some magnitude - how do we arbtitrage the selective imposition of captal requirements, or is it a matter of herding all the high LVR loans on to NZ based banks?- so our taxpayers, not theirs[AUS}, can be easily targeted as the fall guy, when it inevitably goes wrong.
Do we actually have any examples of an RB being ahead of the curve?
10 years ago I think the LVR was typically 80%, they have long missed the boat....
If or maybe when OZ tanks we wont be far behind...the Q then will be will the NZ Govn use the OBR to let the lending side fall over while ppl can still buy food....ie its not going to be a small event.
Maybe time to buy a nice little safe off trademe.
regards
or is it a matter of herding all the high LVR loans on to NZ based banks?- so our taxpayers, not theirs[AUS}, can be easily targeted as the fall guy, when it inevitably goes wrong.
Aw gees Stephen H...that should be the comment of the month, now I know I don't have all the answers but that is where my thinking is on it....
Add to your scenario, the current status of continuing Bank principal under OBR, and you've got yourself a classic fallguy.....
For better or worse the RBNZ have not been completely open in expressing their concerns to the wider public, more a case of explaining to their Commercial Masters, that they have to be seen to have done something if that scenario even half plays out.
Maybe we're just a couple of cynics, but why the sudden urgency on the part of the Governor, as this developing Bank exposure has been there for some time now. So to me there is a domino already in motion downward....and they are aware.
oooh post thought....the possibility of the NZD being 90c in a run up to events.
I find it interesting that Bollard takes so much flak, yet surely the successive Govn's of the day are far more to blame? For instance my impression for much of the last 10~15 years was Dr Bollard warning on the over-heating market that Labour didnt do a thing to cool.
Wheeler isnt my mate at all, inflation is below target, yet he isnt dropping the OCR and manufacturers are suffering, no one it seems is prepared to do a damn thing.
regards
Ineffective.
An anology would be an international road safety regulator that had international speed limits set at 200kph, now reducing them to 180kph. NZ already has 100kph limit so regulating international limits down to 180kph is 'a significant reduction in limit', but in reality completely irrelavent.
The problem is not quite like that....its not direct so more like Queensland? with its unlimited speed limit and having the Govn tell the tyre shops they can only sell HR rated (130mph max) tyres.
The LVR needs to be 80% and 25 years max term, we have 95% and 30 years. To get it to the former without tanking the housing market would take a decade, ie 1~1.5% reductions per year...
but no Govn would tolerate the vote loss.
So whats left is a massive bubble burst, carnage and decades of misery.
regards
The pointy heads at RBNZ are concerened of another Global Financial Crises.
Weve made little inroads with our deleveraging and contracting since the last credit crunch.
Absolute beginners sucked in by the property media hype of big bucks $$$ and the possibility of missing out are taking huge risks relative to what they can afford or even cover themselves should a negative variable occur.
I guess thats the market! The sharks and vultures well be circling when the decoupled market relative to our real economy wages re-aligns.
The only thing is if the RBNZ let the profit driven lending institutions bankrupt the country then it well to be late, and only prove the RBNZ are a pack of useless over qualified intellectuals living in an ivory tower, impractle and out of step with real NZ economy.
Yep, well said.
I hope they are a little more than "concerned" though....they should be petrified. Really though a lot of this Govn's fault (and previous ones). The RB is really the complicent ambulance at the bottom of the cliff IMHO, of course JK will blame the RB and "sort them out".
"a pack of useless over qualified intellectuals living in an ivory tower, impractle and out of step with real NZ economy."
Is there much in Govn we couldnt apply this to? Treasury? just as bad if not worse.
I suspect the sharks and vultures might actually be the first and biggest casualties, these are usually the biggest leveraged in true ponzi scheme style....going to be interesting....yes indeed.
regards
Just like our banks do when they source short term foreign wholesale loans to fund local asset purchases above that possible with the limited NZ deposit base. The problem is they mark up the cost too much to indifferent, but extremely hard working and underpaid Kiwis.
Okay , whats the real agenda here? I guess its to slow the overheating property market down Maybe there is a hope that Banks will insist on a deposit for borrowers buying houses . This wont slow things down much because it will only affect Kiwi's as many migrants are buying with cash they have raised in China
A % and especially the NZ first time buyer will drop out. Even if that is only say 10% of first time want to be buyers that has a big effect through the system as leverage gets reduced.
So as an example 100 ppl now 90, that drops the prices the seller to the first time buyer gets, that in turn means they cant leverage as much and that just flows on up the tree....interesting compounding/multiplying effect. That in urn of course means in a downturn it could easily become a major rout.
regards
I suspect the real Agenda here Boatman is for the RBNZ to have been seen to have done....something... toward a future point they now can percieve to be a reality, not to mention the RBA having whispered in their little ears. (bless em)
Look at that bloody horse itching to get over the hill...!
Well go shut one of the bloody gates then...!
Why not shut em all...?
er, ummm, ...we don't have acess to shut em all, just say we didn't let it bolt, it'll have to do.
stop being so cynical everyone - this is a step in the right direction. A little while ago everyone was complaining that the RBNZ is all talk. Here they are clearly admitting we have high house prices, and stating that this is bad for the economy and we dont want a worsening of the situation so they are doing something. Better than anything Bollard did.
Wise words from an experienced investor:
The new regulations announced today by the Reserve bank, are designed to curb lending on housing over 80% of Loan to Value ratios ( LVR's) effectively requiring buyers to find bigger deposits.
Larger deposits will hurt first home buyers, builders, and push people back into renting,
This will likely lead to increased rents, and possibly create a new wave of second tier lenders ( i.e. finance companies) who will make up the difference.
It was exactly these sort of restrictions back in the 1960’s and 70’s that led to the creation of finance companies - and we all know the result if that.
As the new regulations come into effect ( 30th September) there’s bound to be an early rush of bank applications to squeeze in a last chance which could push up prices even further.
What about those who need loans to set up or expand their businesses?
Will they be held back increasing the chances of more unemployment?
As the vast majority of the market does not rely on low deposits how effective will these measures be?
Nor is it clear if the banks will tightening lending on individual higher amounts per transaction or whether the banks must keep their average amount of lending lower. If for instance half a banks lending is at 40% LVR and the other half at 90% LVR the average is only 65%, which is well within the margin of safety.
You have to the question:
Will this measure work?
I doubt it .
I think wheelers has done one step in the right direction. The banks do need to hold more capital. The banks have been so focused on trying to get market share and not worying about what could go wrong. If there is massive defaults on home loans can the banks afford massive losses? or for example Kiwibank ran into difficulties would the government and tax payer come in and bail them out? Its no good thinking that a bank has adequate capital as any large crisis could suck them bone dry in a very short period of time. Wheelers approach is to get the banks thinking more responsiblity to lending as the ones that are more prudent is likely to pay off at a later date.
Does anyone know if the big banks buy lenders mortgage insurance to lay off their risk on over 80% loans or do they all now self insure and charge a low equity fee?
If it is the former presumably the RBNZ wont require additional capital held against those loans. It it is the latter then the banks are already collecting a payment to defray the cost of them holding more capital. Competitive pressure will determine whether they want to charge a higher rate as well.
From RBNZs point of view their concern is the stability of the banks and the banking system rather than the stability of the housing market. If the market slumps but banks are well capitalised or insured and can take the losses the RBNZ will have done its job wont it?
The clarion call is for housing to be more affordable and more accessible to first home buyers. No one measure in isolation will do anything other than the opposite, as will this. It MAY reduce prices a little but it will NOT reduce them enough for the first timers, it will however, make it easier for foreign buyers.
Go back to the drawing board, the lot of you and do something for NZers, you know, the ones who vote!!!
First Home buyers would require supply side interventions, which is outside of the Reserve Banks area (and not something the Government seems very interested in making significant change about).
My pick, with regards to the pressure on first home buyers, is that the calls for residency requirements around house purchasing will get picked up by some of the minor parties next election, and start to get picked up by the major parties and election or two later. In theory Labour/Greens have a building plan, but like the market I can't see it making enough difference to significantly effect prices (hold down increases, maybe).
There will be a strong surge in house prices between now and September as buyers with only 10% deposit panic to purchase before they are shut out of the market when the rules change. It takes a long time to save another 10% so there will be a high degree of urgency kicking in. Once the rules change the investor buyers, who have plenty of equity across their portfolios, will then have free reign over the market with no competition from first home buyers. Rents likely to increase too due to all the 10% deposit buyers no longer able to purchase!
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