New RBNZ Governor Adrian Orr gets an early opportunity to strike a favourable impression with the public late next month by further loosening the LVR lending restrictions

By David Hargreaves

All eyes will be on Reserve Bank Governor Adrian Orr when he makes his first major public prognostication in the job on May 10. But in reality, it's his second major 'gig' as Governor on May 30 that might be the one we should be watching.

May 10 is the next scheduled date for a review of the Official Cash Rate, the interest rate set by the RBNZ. There will also be a Monetary Policy Statement and media conference. The full bells and whistles thing.

So, there will be a lot of interest in Orr and how he performs particularly at that media conference, given that he has a bit of a reputation for calling a spade a shovel - something that will likely immediately differentiate him from the fairly grey, head-below-the-parapets kind of approach favoured by his predecessor Graeme Wheeler.

The reality is though that unless Orr decides to throw out some curve balls for the heck of it (unlikely; don't upset the apple cart in your first appearance), his first OCR/MPS outing is likely to be just so much cold coffee. Probably interestingly packaged cold coffee, but cold coffee none the less. The prospect of there being any move in official interest rates (from the current historic low of 1.75%)  is zero, while there have been no substantial changes to the economic outlook since the last MPS in February to suggest that the RBNZ's view of the world is likely much changed.

What about the LVRs?

But then we come to May 30. That will be another first for Orr; his first Financial Stability Report (FSR). These are issued every six months and are either of extremely low news interest or extremely high news interest, depending entirely on what is in them. The RBNZ's Head of Financial Stability is actually Deputy Governor Geoff Bascand - but the Governor does oversee release of the FSR.

The last one back in November was definitely at the high end in terms of news value - because it contained the announcement that the RBNZ was going to relax the restrictions on loan to value ratio (LVR) lending from January 1, 2018.

To refresh memories: We've had the LVR limits since 2013, with three different iterations of them during that time, the last of these being the move to require residential property investors to have deposits of 40%, while in terms of owner occupiers, the banks were limited to advancing just 10% of new lending money for mortgages where the deposit was less than 20%.

The announcement back in November was to the effect that from January 1 the rules would be relaxed to the extent that property investors would now just need 35% deposits, while for owner occupiers, the banks could now advance up to 15% of new lending money for mortgages where the deposit is under 20%.

At the time of the November announcement the RBNZ indicated it would monitor the impact of these changes and would only make further LVR adjustments if financial stability risks remained contained.

The house market is quiet

Well, let's see what this month's housing sales figures bring - but to this point the relaxation of the rules does not appear to have led to any rekindling of exuberance in the housing market.

At this stage new mortgage borrowing figures have remained subdued. Yes, the first home buyers seem to have perked up interest a bit, but the housing investors have settled at around a 22% share of new mortgage borrowing - a long way down on the around 35% they were accounting for before the 40% deposit rule was introduced in the second half of 2016.

Would it be too soon therefore to see a further loosening of the LVR rules come May 30?

Not that he strikes you as somebody who would be influenced by such matters, but an early rolling back of the LVRs would certainly be one way to give Orr some instant popularity. And it wouldn't go down too badly with the Government either.

Both Labour and National stated before the last election that they would like to see LVRs gone.

The new Government is of course making a lot of the right noises about ramping up house construction and being able to get Kiwis into affordable homes. 

There's two aspects to that; firstly the Government's policies should keep the pressure off the housing market, while secondly, giving particularly first home buyers more chances of being able to borrow for homes (by relaxing LVRs) plays nicely into the Government's narrative. 

Definite scope for relaxation of LVRs

So, anyway, assuming there's no nasty surprises between now and next month, there's definitely scope for further relaxation of those LVRs. 

The big question then would be, by how much and do we start to move to get rid of them altogether?

Here is where Orr's personal approach to the situation will be very interesting.

The LVRs are part of the RBNZ's macro-prudential policy 'toolkit', which was created through a memorandum of understanding between then Governor Wheeler and then Finance Minister Bill English in 2013.

A review of macro-prudential policy, which was scheduled for this year in any case, has now been put into Phase 2 of the review of the Reserve Bank Act for later this year.

Previously the RBNZ has been keen to see some kind of debt servicing instrument introduced into the macro-pru toolkit. Hindsight's a wonderful thing, but the RBNZ definitely missed a trick five years ago when it didn't push for for debt-to-income (DTI) ratios or something similar to be included in the toolkit.

What will the new Governor think?

After the RBNZ did approach the then National Government toward the end of 2016 to get DTIs it was pushed back, being forced to consult on the idea first before going back to the Government to seek permission for it. It was skilful delay by the National Government, which took DTIs off the table before the election.

Grant Spencer, the previous Head of Stability at the RBNZ and who recently retired after serving six months as Acting Governor, again spoke out in favour of a debt servicing instrument in his last major speech before retiring.

In the same speech Spencer also stressed that while the LVRs had been seen as 'temporary' he now saw the potential to have them basically left in place, but with the policy able to be adjusted as needs require "binding and non-binding settings". So, in other words you leave the LVRs there in the mix, but kind of 'turn them off'.

So, how will Orr sit on such issues? Hopefully as well as some sort of steer on the immediate situation with the LVR settings, we may also get some insight on May 30 to how Orr views the macro-pru tools - and I guess how ardently or otherwise he will be pushing to retain them through the review later this year.

With the housing market currently still quiet, I do think the opportunity should be taken to relax the LVRs further. 

There's no doubt however, that very careful thought needs to be given to how we want macro-pru policies to be deployed in future - assuming they are still seen as desirable. Would Orr be interested in taking the RBNZ in another direction? Will macro-pru tools still be considered vital? It will be interesting to hear Orr's views.

These are the sorts of decisions that are definitely best made while the housing market is quiet. Get the ducks in a row while you have time.

Arguably at least some of the extreme heat that was generated, particularly in Auckland, might have been avoided if the RBNZ had a full arsenal of weaponry available earlier.