Four years after they were introduced to combat a rampant house market, the loan to value lending restrictions appear likely to be phased out soon; but how, and what happens next?

By David Hargreaves

It was, as ever for a Reserve Bank prognostication, punctuated with meaningful silences and with very lightly twitched eyebrows, but I think the RBNZ's Acting Governor Grant Spencer signalled last week that the central bank's about ready to start releasing the handbrake on the New Zealand housing market.

The loan to value (LVR) restrictions have been with us now for a little over four years (yikes, where did the time go?) and there were probably a few people out there - yours truly included - who thought they might be with us forever.

But maybe not.

The RBNZ has got its next Financial Stability Report coming out on November 29. These reports in the RBNZ's words "assess and report on the soundness and efficiency of the New Zealand financial system". The reports, published since 2004 are, in my words either as dull as ditchwater or extremely newsworthy depending on the issues of the day.

Well, the next one is likely to be in the latter category, with Spencer having indicated that the bank was in regard to the LVRs "reviewing the restrictions and the criteria that we would adopt for their removal. We'll be saying more about that at our Financial Stability Review..."

What should we expect then?

The evolution of the LVRs

It's worth briefly recapping the evolution of the LVRs. They are one of the 'macro-prudential tools' (there's currently four in total) that were signed off in a Memorandum of Understanding between the RBNZ's then Governor Graeme Wheeler and then Finance Minister Bill English in 2013.

The LVRs were officially introduced on October 1, 2013 through a 'speed limit', with banks unable to advance any more than 10% of their new lending at LVRs in excess of 80% of the value of the property being mortgaged.

They worked. House prices backed off from their super hot intensity of 2013 over the following year. However, while the RBNZ was quick to talk up the success of the LVRs - no assessment of the housing market in 2014 is complete without reference to the four (erroneous) interest rate hikes that the RBNZ implemented that year in the belief that inflation was about to surge. The rate rises were ultimately reversed, but there can be no question that having these rate rises on top of the LVR restrictions would have been a significant dampening influence during 2014.

By 2015 interest rates were heading back down again - and the housing market, most particularly in Auckland, was off to the races again. The RBNZ responded with LVRs II. (These were announced at one of those 'very newsworthy' Financial Stability Report releases). From October 1, 2015 in a new development Auckland housing investors had to find 30% deposits on purchases in the Auckland area. The 10% 'speed limit' for high LVR bank lending was retained on owner-occupier mortgages in Auckland - but elsewhere in the country it was loosened slightly to 15%.

The Auckland experiment

It's worth remembering that the RBNZ was originally very tepid, to say the least, on the idea of Auckland-centric LVR measures and didn't seriously consider them for some time. It changed its mind though, possibly against its better judgement - and perhaps subsequently regretted that it did.

The measures didn't work. With interest rates now low again and falling further, the new iteration of LVRs arguably only helped to pour more petrol on the house fire. It seemed that in Auckland, any investors who couldn't get over the line with a 30% deposit for an Auckland property switched their sights to places like Hamilton and Tauranga. House prices in the regions, which had been relatively subdued, now took off as well, fuelled by a combination of the Auckland investor property thirst and by the slight loosening of LVR restrictions for local owner-occupiers. 

So, come the middle of last year, with a now nationwide raging house market, and with no sign of interest rate rises on the horizon, the RBNZ had been firmly caught with its LVRs down. It reached for the blunderbuss. On July 19, 2016 it unloaded a 40% deposit limit on all housing investors - nationwide. The 'speed limit' for the banks of just 10% of their new lending on high LVR loans for owner-occupiers was reapplied right across the country. Officially this change came in again on October 1  but in reality the RBNZ asked - and the banks acquiesced - for the 'spirit' of this new rule to be applied on the date of announcement; that is, July 19.

These measures have had an impact - that is without question. But once again, like in 2013-14 it is not quite as simple as saying that the LVRs came and the housing pressures went. In the past year it's not just been the new supercharged LVR measures having an effect.

Banks happy to hide

There's no doubt the banks, facing their own pressures have been - to some extent at least - happy to hide behind the RBNZ and its rules in order to cut back on their lending.

The banks have faced funding pressures stemming from greater capital requirements being made of their (mostly) Australian parents, while a shortfall of deposits has provided a squeeze on funding. They have been 'rationing' credit and pushed some interest rates up. 

Additionally, with new restrictions placed on withdrawal of money from China, the overseas buying interest has definitely receded. This is, however, a subject that remains in many respects anecdotal in nature since the information collated on overseas ownership of New Zealand houses is by no means complete or comprehensive enough. Interesting that the new Government is pledging a proper register on offshore ownership of land and housing. This is a very long overdue measure that the previous Government steadfastly refused to countenance.

And then there was the election, with the uncertainty of what might happen in terms of the result, causing the housing market to seriously hit the pause button.

Now, after the election, we had the uncertainty of who was going to govern, followed by the uncertainty of just what and when the now new Government would apply in terms of housing policies. 

Sending signals

The planned ban on offshore buyers of existing houses, while largely symbolic in nature, shouldn't be underestimated in terms of the signal it will send out that New Zealand is no longer an 'easy touch' for overseas investors looking to throw a bit of spare change into some bricks and mortar here.

The extension of the bright line test regarding tax on profits on sale of houses to a five-year period should also be a dampener. 

The intentions to build more houses - if aggressively followed through on, and there are a lot of ifs with this, given the labour and materials constraints in this country - should take some pressure off the housing shortages.

Add all this up and the housing market should be restrained for the foreseeable future.

So, the chance is definitely there for the RBNZ to start loosening the LVR restrictions. Note that the word is 'start'. The RBNZ has already clearly signalled it won't lift the measures in one go. 

What to expect?

All of which raises the question of what might be expected from the November 29 announcement.

I would be surprised if we see any lifting of restrictions immediately. With its essentially cautious nature then it is to be imaged that the RBNZ would want to get through the 'hump' of the summer housing market before lifting any restrictions.

The best guess is that the summer market will be quiet this year, but the RBNZ might not yet want to risk reigniting anything. Therefore I would see it unlikely we would see any lifting of restrictions in the first quarter. Could be wrong of course, but I think the RBNZ will want to signal well in advance.

Assuming such is the case, what comes first?

It was worth noting that the RBNZ in its comments around the release of the latest Monetary Policy Statement last week expressed confidence that some of the new policies being introduced by the Government on housing would help to keep demand from housing investors moderate. Yes, specific reference to the investors.

Investors come first

That would suggest me that the 40% deposit limit for investors will be the first to be relaxed. Would it be removed in one go? Probably not. It could be moved back to say 30%, maybe say from April on, and see what happens. And if that works, well maybe a further reduction later in the year.

But what about the 10% 'speed limit' applied to banks on lending over 80% for owner-occupiers?

I would be surprised if this is removed very quickly. 

The real estate industry prior to the election launched a strong assault to get the LVRs removed for first home buyers. There was a problem with the logic though. The official figures show that since the investors have been forced into backing off, the first home buyers - restrictions and all - have been able to get a better share of the market. They ARE finding ways to buy.

The RBNZ might be cautious about lighting the blue touch paper for scores of wannabe FHBs to come forward. Therefore, my suspicion is that the RBNZ might hold fire on announcing any change to the LVR speed limit at the end of this month and might instead push the whole thing on to its first Financial Stability Report next year, in May. 

Really it depends how much, either real or perceived, pressure the RBNZ is feeling under from a new Government that prior to the election indicated it wanted LVRs gone. Perhaps the RBNZ might signal a loosening of the 'speed limit' for the banks - say to 15%, as was done previously, again perhaps after the first quarter of next year. As I say, it depends how under pressure the RBNZ feels on this.

Gone by 2019

When might LVRs be removed in entirety then?

I would say they could be gone by the end of next year - if the housing market doesn't take off again.

One significant factor though will be whether the RBNZ can get a concession from this Government in terms of putting some sort of debt servicing measures into the 'macro-prudential toolkit'. 

Previously the RBNZ was dead keen to get access to debt-to-income ratios, even going so far as stating it wouldn't use them at the moment, in order to try to get the previous government to agree to them. The National-led government wasn't having it and kicked the thing into touch till after the election.

Still making sense

Acting RBNZ Governor Spencer said last week: "We still think that it makes sense to have some sort of macro-prudential debt service tool in the macro-prudential toolkit but at this stage we are planning to sort of wind-in that issue into the macro-prudential review, which we are conducting jointly with Treasury over the coming several months."

So, the DTIs as originally envisaged are sounding like a non-starter, I infer. But if the RBNZ is to remove the LVRs I think it would make abundant sense to put some sort of debt servicing measure into the macro-pru toolkit as an additional back up for future. I would rather 'next time' see a debt servicing tool used first before LVRs.

The LVRs have done a job. But they've been a fairly blunt instrument. Nobody's going to be sorry when they are gone and there just may be better ways of reining back demand for housing investment in future.

Whatever happens, it's worth noting November 29 in your diary.