The New Zealand Institute of Economic Research (NZIER) says the Bank of England’s move to restrict high loan-to-income (LTI) residential mortgages is a better way of managing financial stability risks than the Reserve Bank of New Zealand's restrictions on high loan-to-value ratio (LVR) lending.
The Bank of England recently said no more than 15% of banks' new mortgages should be loans of more than four-and-a-half times a borrower's income.
“We like the Bank of England’s proposed restrictions on high LTI mortgages better than New Zealand’s LVR restrictions.” said Dr Kirdan Lees, Principal Economist at NZIER.
The Bank of England's approach to financial stability directly targets the risk of whether people can afford to pay back their mortgage, which the LVR restrictions only do indirectly, added Lees.
“Restrictions on high loan to income mortgages directly address the risk that the Bank of England is worried about: that very high household debt could cause a sharp economic correction in the future. High LVR mortgages only tell you that house purchases are made without much collateral. But LVR restrictions do not take into account households’ long-term ability to service debt," said Lees.
He said the Bank of England has a policy solution for a well-defined problem being stopping soaring household debt that sits at the heart of financial stability risks.
"Controlling house prices is not part of the Bank of England’s problem," said Lees.
In contrast LVR restrictions will constrain risky lending, but the gains look to be limited and the policy carries unintended consequences.
"We should look at LTI restrictions, as they are better targeted at the risk of financial instability created when many people cannot repay their debt," added Lees.
The Reserve Bank introduced restrictions on banks' high LVR residential mortgages from October 1 last year. This means banks must restrict lending at LVRs above 80% (where borrowers don't have a deposit or equity of at least 20%) to no more than 10% of total new mortgage lending. This 10% limit excludes high LVR loans made under Housing New Zealand’s Welcome Home Loans scheme, the refinancing of existing high-LVR loans, bridging finance or the transfer of existing high-LVR loans between properties, and new residential construction loans.
Reserve Bank figures for the first six months of the LVR restrictions show banks' high-LVR commitments fell to just 5.6% of total commitments, including exemptions, and around 6.8% before exemptions versus 25.1% as recently as last September.
The Reserve Bank's May 2013 final policy position on its macro-prudential policies covered off LVR speed limits, sectoral capital requirements, adjustments to banks' Core Funding Ratio, and a Counter Cyclical Capital buffer. Areas of regulation that were "not in scope" for the "base framework", but "may form part of the bank's future work programme" included "the case for incorporating debt-servicing capacity into the macro-prudential framework."
BNZ CEO Anthony Healy last month told interest.co.nz he didn't want to see New Zealand follow the path Britain's taking to tackle similar issues LVR restrictions were introduced here to combat.
"I'm not sure that picking an arbitrary number of four or four and a half times salary and saying 'that's the highest you can lend to' is; A) a call that a government should make, or B) the right number. I think it's a bit arbitrary," said Healy.
"Our models are much more sophisticated than that. We look at house prices obviously, we look at leverage, we look at income levels. But also what people spend, what their other income sources are, what their likely increases in salary (are) over time. So I think you have got to be careful when you over regulate this stuff," Healy added.
53 Comments
Except the point isn't about how 'much you can borrow' but what stabilises the banking industry best.
Is a loan limit determined by someones income better than a loan limit secured over a % of someones hard asset? If I was the lender, I know which I would prefer to have and its the security over the hard asset.
There is nothing wrong about a lot of debt - it depends on the security backing it. If you retire on very low income but have a million dollar house there's no real risk to the banking industry taking out a $50,000 reverse mortgage to buy a new car or boat or pay medical bills regardless of your income level as you still have 950,000 in equity, if thats what you wanted to do.
Completely disagree. A move to affordability would help out a lot of our professional couples - they earn a lot but don’t have a deposit saved - They can not buy a house here - which might lead them to leave the country (i.e. brain drain) or we can lend them money they can afford EASLIY.
As per the article above "Controlling house prices is not part of the Bank of Englands problem..."
Firstly the bank isn't concerned about controlling where people should or should not live, its about 'bank stability' and protecting the wider economy from such a failure.
Secondly, if the example you give were true and they earn a lot but cant save a deposit one would wonder why this would be? I wouldnt lend money to someone like that, who didnt have the discipline to save - why would the bank?
Thirdly - but not letting them buy you are removing them from the buy side therefore helping to make houses more affordable.
Fourthly if they have high incomes it shouldnt take them long to save a deposit if they wanted to, if they choose not to save one then they can still get a loan from the bank more than 80% as banks do make these loans under the LVR restrictions, especially to high income earners who are at the front of the que for such loans.
Controlling house prices might not be part of the problem they are saying they are trying to deal with, but they will reduce demand, which will have an impact on prices.
When one looses a job it really doesn't matter how much they have borrowed (4.5 x old salary or 20 x old salary or even 1 x old salary), if it can't be paid back, it still can't be paid back.
Yes thats probably right on reducing demand. But is it the banks role to say what a seller can or can not get for their property if someone else wants to buy it for that? If they can raise the funds the seller wants and it doesnt put the banking system at unacceptable risk then why should the central bank - unelected officials - care about removing wealth from sellers? Thats not the banks job, if anything it should be the elected officials (or better the buyers and sellers themselves) who determine if anyone how wealth is to be apportioned. The bank just needs to be concerned with do loans have adequate security - ie if I make a loan the first think I think of is am I going to get my money back?
If someone looses their job it can be paid back by selling the asset against which the loan was made, that's the point of LVR restrictions being better than LTI. If someone looses their job it DOES MATTER how much they have borrowed, not in terms of their 'old salary' but in terms of the asset security value the loan was secured against (ie LVR). I dont care what their salary is or was, the point is at 80% of the asset - I'll get my money back.
No scarfie 'the ability to pay a loan back is the paramount consideration'. And this is better determined by the LVR than the LTI.
LVR is about security over an asset, independant of someones income (ie loan capital preservation). LTI is more about servicability. The RBNZ is more concerned with capital preservation being bank stability than bank profits. If something went wrong with someones income the LVR restrictions mean the capital of the loan is not threatened (thus the banking system not under risk) as the property can be sold at a 20% discount and the bank still gets its capital back, even if the borrowers income goes to zero.
Q - Why did multi-billion dollar banks go from making hundreds of millions to suddenly broke? How could this happen? Was it because their customers just missed an interest payment or because the bank couldnt recover the capital of the loan and thus its own capital got wipped out virtually overnight?
Or - in the extreme - what would be less risky as a lender? - a loan of 80% of a property value or a loan of $100,000 to someone who had no assets but went on a big world trip - but had a high income? I'd pick the former as I'm still going to recover my capital, regardless of what happens to the borrowers income (or expenses - like the birth a a baby or a sick parent etc...).
No I dont prove your point scarfie. I think you are confused. Banks go broke because their capital takes too big a hit, that ONLY happens because loans don't have the collatoral behind them, not because someone missed an interest payment for a month or two... - the latter just means their dividend to shareholders will be less.
As a banks leverage increases profitability can increase but its stability tends to decrease (due to the higher leverage). LTI is about limiting leverage based on someones income. LVR is about limiting leverage on collatoral so the capital is protected independant of income. So if something happens to the borrower the loan can still be repaid, no worries. Banks went broke not because of lack of collatoral meaning the banks capital got wipped out.
No it is you who are confused (and Steven) by having a narrow modern view of lending and not taking into regard thousands of years of history on the matter.
Your ideas of housing are collatoral are also nonsense. You use something to back a loan that is inflated in price by the very act of making the loan.
I introduced the term responsble, you came along and talk about leverage, the two are mutually exclusive. There is plenty more wrong but I hope you get that the context for my comments are a little wider in scope than yours.
I cant speak for Steven so don't know what you refer to, nor the thousands of years of banking history you refer to either.
1. Banks create leverage when they make any loan scarfie. All loans are leverage on deposits - you can't talk about LVR/LTI/loans and not talk about leverage in a fractional reserve banking system - just go look it up. Both the LTI and LVR restrictions are about limiting the leverage banks can create in giving loans to a responsible level that doesnt put the whole system at risk.
2. If someones wife got sick and was given 12 months to live and the husband left his job to look after her, but their LVR is say 45% on a $million house, there is nothing wrong or irresponsible with them getting a loan for $25,000, even with their income going to zero - it doesnt actually destablise the banking system and is not irresponsible to allow such a loan - why can't people see this???? Its the collatoral that matters to the banking system, not income.
2. You believe someones future income (something that has not even occurred yet) is a better basis for a loan than 80% or less of todays property value, so be it then, its a free world and everyone has an option, I (and many others) of course disagree totally. Try convincing your bank manager of your view then. Good luck.
3. Your argument that it inflates the price can be used for anything - getting a loan to buy a car inflates the price of cars, getting a student loan inflates the price of a degree, getting a loan for a boat inflates the price of boats, infact just people getting loans inflates other peoples income generally, etc.... I think if you thought about that remark you would see how pointless it is.
It is the interest that creates the inflating effect.
Banking parasitic, a simple fact. You empower them even more when you give them access to the ability to pay and to the asset, they don't need to care about the ability to pay. That is why thousands of years of lending generally had better principles around the act.
Yes that is a problem. If (when) interest rates rise offshore it will wreck a right mess, but those same governments cant afford rates to rise to market rates, so the central banks have to supress the rate and find a way to eventually monetise their entire debt basically. Not so in NZ. You might eventually find a lot of those people selling their assets here to cover losses back home if central banks loose control of the bond markets. With 50+ million vancant apartments in China I wouldnt bet against a crash there. I don't think the answer is to lower our rates to match theirs, (I'm glad the RBNZ is reloading to play another day). I'd be happier if they also banned non-resident ownership of land, although its not that easy to do in reality as it seems.
Auckland also has a land supply problem pushing up prices.
NZ interest rates have little relationship to Auckland property prices.
So what is the problem that RBNZ is solving by hiking?
How immune from global concerns is NZ?
The land supply problem is a red herring. You could add 10000 sections in Auckland without denting prices.
Simply making a loan increases the money supply by creating a 'deposit', even if the interest rate was zero.
If central banks didnt support the bond markets by QE and currency swaps interest rates would move a lot higher, asset prices would deflate, not inflate, even as interest rates rocketed up. The whole idea of QE was to keep interest rates suppressed so asset prices could remain high so banks didnt go to the wall. The experiment is still ongoing.
By 'professionals on a good income' I will assume you mean 'below average salary'. A couple on an average of 48k each saves hard for 4 years. Assume student loan and they are in KS at 3% contribution. They rent a 1 or 2 bedroom house.
Income after tax and SL $1345 per week
$300 rent
$265 food & utilities
$100 Transport
$200 Misc - clothes, entertainment, other, etc...
$480 saving x 4 years + interest = well over 100k. More than 20% deposit on an above average NZ house.
They buy a 500k house as their first house, loan 400k, 25 yr table mortgage at 6.25% = $610 per week.
you're about 25-30% shy on your expenses if not worse.
$265 for utilities & $265 for food, for a modern couple who haven't build up assets behind them would be closer.
Even buying decent beds costs a fortune. Let alone car insurance, contents insurance.
And most places in NZ aren't going to pay a young couple 48k each.
And just what do they do for entertainment if _two_ people (who require 48k level image) need clothes, other etc. For young folk that $200 would be nearer $200 each. A decent set of footwear will swallow most of that 200. A decent bra is over $50 and lasts sod all. A good work shirt will set you back $70-$90.
Old saying two can live as cheaply as one, if one does eat and the other doesn't wear clothes...
Maybe Im a bit out on expenses then, but not by that much, I have no idea why utilities would be $265 per week? Our power bill for 2 adults and a 9 year old (4 bed/2bath house) is around $150 a month ($35 a week). Internet and phone line $74 a month. True, I am assuming 'if they are a modern couple working' they already have bought furniture, but I wasnt thinking of starting the 4 years directly after uni. I was unaware your were expecting them to buy clothes every week....
Go shopping at Farmers red dot sales and get 50% off bras and work shirts etc...
Utilities tend to be higher because young folk tend to live in cheaper accomdation and use more electricity and phone and tolls and internet.
Likewise they also tend not to have great cooking habits, so while they might be cheap they are seldom low wastage. And frequently the haven't had the resources to build up cupboard stocks and cookery gear. so if they're living the down-low as poor folk they might cut back, but with adaquate funds their spending will rise to the level of their income in such items.
Likewise with clothes. A 48k job means not going with the cheapest items. and the bras don't usually end up red dot, and often the cheap ones just aren't worth the pain or the failure rate. I used to get those shirts, they never fitted properly and tended not to wash well. I now pay more for shirts, they're now _comfortable_ even with a tie!, the sit better and last much longer.
But that's why it tends to be clothing items every week you're not covering car bills, insurance, bond on the rental, or some other "once off". dental perhaps?
And yes that's folks coming straight from uni +/- a year. cause they're not often going to a couple pulling 48k _each_ (in easy travel distance, for both jobs, with both getting around that) unless they're university qualified. And uni clothes seldom last long in a commercial workplace environment.
security by income can be seized, the sale is still made at sale price. However income is risk, rentals lose tenants, businesses have bad months, jobs can be lost, or the partner/lawyer can run off with the trust fund.
Hard assets are more secure, but because of their nature, it is very hard to sell fractional pieces and they tend not to be fungible. Often they also are important in living or income, so the income is risker (thus unsecured loans attract higher risk premiums to cover those that do collapse), hard assets are bigger loans, cost more to set up, but tend to be at lower premiums and the due diligence is a little heavier.
The bankers response is outright funny. There is no altruism or "sophistication", their only concerns being that the "mark" be taken for the maximum they are able to pay without killing them and that sufficient equity exists that the lender does not lose in the event of a distressed sale. High LVR loans are insured at the borrowers cost. It is the golden rule, he who has the gold makes the rules.
Arbitrary figures are enforced all the time for socially beneficial reasons, roadway speed limits, the age of consent, alcohol serving hours, time served as apprentice etc. their benefits far outweigh their limitations and those who would argue against them are not promoting the public good.
As highlighted, the high LVR test is indiscriminant and easy to circumvent with deposit gifts and parralell borrowing leaving foolish borrowers lining bankers and speculative vendors pockets. The LTI test more accurately aligns property values to incomes in a fashion similar to rents in a locality. Little wonder bankers would not prefer it.
Which is chosen depends on whether the true reason is to protect the lenders (LVR) or the borrowers (LTI).
Actually I think neither lender or borrower should be protected. So really do we want to protect the banks? or lenders? Surely as a decision / contract between to adult parties we or our Govn should as much as practical not interfere as long as it impacts no one else.
ie there is another group to protect actually, the tax payer which for me is the idea of a LVR.
The rule/regulation should only be protecting "innocent 3rd parties" such ast the tax payer from the effect on the economy or Govn's balance sheet in the event of a severe housing bubble pop.
I am quite happy for lenders who have leant too much to go bankrupt, they are adults after all who chose to borrow. I am quite happy for banks to go bankrupt, they are parasitic and greedy and chose to lend at ever greaer risk so I wont shed a tear for them that is for sure.
regards
I am not sure it matters as the % or ratio chosen in either system would need to be set to get the desired effect.
"made without much collateral" surely this is relevent due to bank leverage? So the asset on the books of the bank is only an asset if its value is greater than the mortgage? If houses lent at 95/5 a drop of 10~15% on the value of the houses then in effect the bank can become insolvent?
With a LVR of 80/20 then the drop needed would be significant for the same insolvency to occur?
regards
I wasnt here. I was however for some mess ups in the UK and I lost quite a bit of money. I took a lesson from that dont trust thefinance sector they are in-competant.
http://www.stuff.co.nz/sunday-star-times/business/776473/Lessons-of-the…
Frankly its not unlike the UK.
I feel sorry for innocents, I dont feel sorry for the greedy.
regards
Yes I do have deposits, and yes I understand the OBR.
I also understand that there is no such thing as a risk free investment.
The point is to protect the inocent party ie the one who see's no direct benefit from the transaction in this case the tax payer.
So the shareholders, CEO and Board should suffer the first losses as they actively took teh risk to line their own pockets. Yes and then followed by the depositors IMHO, depositors should not be immune from loss.
regards
@ Steven, agreed in principle, personal responsibility and all that, provided the risk is shared by the banks. The American sub-prime thing showed the world that it was very possible to lend to those who it was known could not afford it and leave them holding the can. Simple pump and dump.
Maybe allow unrestricted lending but only with no recourse loans, all risk to the lender. I hardly imagine the banks would rush to lend either high LVR or LTI then and properties would be valued reallistically by the banks, not emotionally by the borrowers. It would force them to regulate themselves with material penalties for greed and poor judgement.
Not strictly true as many US states (most? a few?) have non-recourse loans as a norm in law. So if the mortgagee goes bankrupt its jungle mail time.
If we look at who was left with the can it appears to have been the institutional investors and the tax payer by and large.
Yes I agree with no-recourse loans, I am all for it as the lender and lendee are not on a level playing field. With a no-recourse loan the duty of care falls on the professional lender, where it should be IMHO.
"It would force them to regulate themselves with material penalties for greed and poor judgement." I would hope so but the US is an example of that not working too well as the problem is the bank employess know taking big risks get them the bonuses and their bank carries the risk. then at least hwoever its all the banks and shareholders problem.
regards
Of course not, the risk then is on them, and being professionals, that is where it should IMHO.
eg as a professional consulting engineer if I designed something for a client and it didnt work or worse failed or even worse someone died, I would be liable even if I met a criteria (usually low cost) the client demanded. In this case I have to have PI (Personal indemnity) and be prepared to talk away from work if its un-achievable. Now in somewhere like London were there is heaps of work and fair clients (or at least I can pick and choose) no issue, in NZ where there is too little work and frankly lots of assholes, whole different ball game.
regards
The NZ banks already have loan to disposable income restrictions; generally a NZ bank will want to see your (and partner) disposable income cover mortgage repayments at 6% so if you have a 500k mortgage they'll want to see at least $30k disposable income to cover the interest only portion plus more disposable income for repayment of the principal or another method to cover the principal at term.
Key word being disposable; no use measuring total income.
LVRs are the better approach because they encourage higher capital requirements for banks and individuals and generally make the system more stable.
steven: says - no one should be protected - caveat-emptor you say
That is a pre-historic ideological view of the world
In this day-and-age of complexity, where institutions and organisations can become so large they use their size and power in such a way they shove a 500 page legal agreement in front of you, if you want to deal with them, and if they stiff you they simply say "so sue us, we will see you in court, any time you like, name the day"
Right now there is a saga playing out in Sydney involving CBA - Commonwealth Bank - who you should be familiar with - it is the largest of the Big-4 banks, it used to be owned by the Australian Government until mid 1990's when the Government sold it off, not for altruistic reasons, but in order to pay down massive government debt.
Now it has been discovered what dishonesty it has been getting up to
You should read all about it (here) and then re-offer your opinion http://www.smh.com.au/business/scandal-shows-its-time-to-clean-up-finan…
And you can follow the saga,in depth, here with more articles from the investigative reporter http://www.smh.com.au/business/by/Adele-Ferguson
Right now in Australia there are 3 Royal Commissions plus 1 standing (permanent) Royal Commission going on into corruption at the highest levels - 1 into paedophilia by institutions - 1 into the pink-batts affair - 1 into corruption of unions and use of slush funds - and 1 into political corruption by politicians and property developers and money laundering
If the insurance fraud being perpetrated by the big insurers on the plebs in Christchurch was happening in australia, they would be having a Royal Commission into it by now. Not so in New Zealand. Carry on people, tomorrow's another day
Hi,
Lets not take this to the extreme, that wa snot my meaning or intent. Yes I agree that large organisations can "muscle" ppl, hence I like no-recourse loans and I think that probably should be in NZ law.
What we see on the other side is of course moral hazard. If some ppl know someone else pays for the mistakes then crazy risk will be taken for big gains knowing there is no personal downside.
So I think ppl should take and expect to have to live up to "fair" responsibility for their actions, and this includes the scandles above and if indeed criminal throw them in jail.
regards
You didnt read the articles did you?
Had you read them thoroughly, you would discover that the behaviour of CBA towards its customers was fraudulent - intended to defraud them of their rightful due - (in my view) no different to what the insurance companies are doing to their customers in christchurch
And right on cue, this very day, the drumbeats begin
Professor Allan Fels ex-head of the ACCC calls for an enquiry into the activities of the insurance companies (the parents of the very same insurance companies in New Zealand)
Don't hear any drumbeats coming out of New Zealand except from Kumbel
The point is not so much caveat-emptor, but a matter of hidden cost, market cartel and duplication of "insurances" (ie extra charges to cover loses, not insurnace company policies).
The tax-payer should be footing any bill for bank activity, unless the tax-payer is demanding something beyond true public safety/public good. (pub good/safety = eg the bank building isn't death trap, proper records are kept)
but what we're getting is a bunch of added costs, which are all being passed on to the savers and borrowers. Those added costs remove savings returns (reducing the value of saving) and increase the cost of debt (which must be recovered from sales margins, effectively reducing wages)
There is always risk but how much covering their butts at everyones elses expense is appropriate? As long as those added costs can be passed on, and government keeps addding more hurdles, then the deflating power of bank costs will strangle the economy. ... and if RBNZ keeps putting up interest rates because businesses are having to recover higher costs it will be diaster.
I think LVR is better than LTI, someone can loose their job/get sick/business fall over, therefore not be able to service the loan, easier than houses dropping over 20%.
At least if your LVR is under 80% and you loose your income the bank can still expect to recover the loan in full.
I like the BoE proposal . but whats the penalty for Banks that fail to comply?
Maybe they should be disallowed from prosecuting a defaulter ( bad debt) if they break the rules .
They will only take one or two hard punches to realise that compliance is better then non-compliance
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.