The Reserve Bank's moving to loosen loan-to-value ratio (LVR) restrictions on banks' home lending.
This was announced by Deputy Governor and Head of Financial Stability Christian Hawkesby on Wednesday and comes ahead of the release of the central bank's latest six-monthly Financial Stability report next week (May 3).
"Our assessment is that the risks to financial stability posed by high-LVR lending have reduced to a level where the current restrictions may be unnecessarily reducing efficiency. In particular, impeding the provision of credit to some otherwise creditworthy borrowers, which is not proportionate to the level of risk that we see," he said.
The loosening (probably taking effect from June 1) means for owner-occupiers that banks will now be able to advance up to 15% of their new lending (up from 10%) to customers borrowing on a loan to value ratio of in excess of 80%.
For investors the currently very tight restriction that they must have 40% deposits to buy will be relaxed to 35%.
Hawkesby said national house prices have fallen towards a level "that is more consistent with medium-term fundamentals".
"As a result, while house prices may continue to fall, the probability of a further large correction in house prices has reduced. Alongside this, lending conditions have tightened significantly as banks’ debt servicing assessments allow for higher interest rates."
As interest.co.nz recently reported the big banks are now stress-testing would-be mortgage customers at rates in excess of 8.5% and in some cases over 9%.
Mortgage borrowing has dried up. According to the latest available RBNZ figures, in the first two months of this year new mortgage borrowing totalled just $6.6 billion, down from $10.4 billion for the same two months last year and $14 billion when the housing market boom was approaching its zenith in 2021. In fact March 2021 saw a record high of nearly $10.5 billion borrowed.
The LVRs were first implemented in this country by the RBNZ in 2013.
In response to the pandemic in early 2020 the RBNZ removed them entirely, only to then announce in late 2020 that they would be reintroduced. This was after the housing market had basically set on fire.
House prices gained something like 40% during the pandemic.
The LVRs were officially reintroduced by the RBNZ in March 2021 and tightened further - to the levels they are currently at - in November of 2021.
The New Zealand housing market peaked in November 2021.
According to REINZ figures the national median price reached $925,000 that month. Since then prices have headed downhill. As of March 2023 REINZ figures, the national median had shrunk to $775,000, which is a drop of 16.2% from its peak.
But it is well worth mentioning that this $775,000 median figure only takes the market back to the February 2021 levels, at which point the market was raging. The national median as of February 2020 was just $640,000.
The RBNZ has been involved in a long, drawn-out process, to add a loan serviceability measure - a debt-to-income restriction - to its 'macro-prudential toolkit', which of course already includes the LVR restrictions. It recently released details of the proposed framework for DTI restrictions.
The central bank has made no commitment to enforce DTI restrictions. Rather it has previously indicated it could have a DTI limiting tool for lenders to use on borrowers taking out home loans ready to go in March 2024. It's still going by this timeline, with the banks therefore getting 12 months to get their systems ready, should they be required. The RBNZ says given the housing market is currently in a downturn, there's no immediate need to implement DTI restrictions.
In releasing the framework for the DTI restrictions the RBNZ said it was "possible we could loosen LVR settings if and when DTI restrictions are in place, while still maintaining our financial stability objectives. This would benefit first-home buyers, since saving for a deposit on a first home can be challenging particularly for those on lower incomes".
The RBNZ had wanted to have a DTI tool in its macro-prudential toolkit since at least 2016 but struggled to secure government support from firstly the National-led government and then the current Labour government due to concerns about the potential impact on first home buyers. It finally gained support from Finance Minister Grant Robertson in June 2021 as the housing market ran rampant.
This is the RBNZ LVR announcement from Wednesday:
The Reserve Bank of New Zealand – Te Pūtea Matua is proposing to ease mortgage loan-to-value ratio (LVR) restrictions.
LVR restrictions promote financial stability by limiting high-risk mortgage lending. This is done with the aim of reducing the impact and severity of housing market corrections by increasing the resilience of the banking system and households.Current LVR settings were put in place November 2021 when risks were elevated. The restrictions built resilience in the financial system, which has been evident in the past year as house prices have fallen without widespread impacts to financial stability.
“Our assessment is that the risks to financial stability posed by high-LVR lending have reduced to a level where the current restrictions may be unnecessarily reducing efficiency. In particular, impeding the provision of credit to some otherwise creditworthy borrowers, which is not proportionate to the level of risk that we see,” Deputy Governor Christian Hawkesby says.
National house prices have fallen towards a level that is more consistent with medium-term fundamentals. As a result, while house prices may continue to fall, the probability of a further large correction in house prices has reduced. Alongside this, lending conditions have tightened significantly as banks’ debt servicing assessments allow for higher interest rates.
Restrictions on high-LVR residential mortgage lending set a ‘speed limit’ on how much new low-deposit lending banks can do. We are proposing to ease LVR restrictions with effect from 1 June 2023, from:
- 10% limit for loans with LVR above 80% for owner occupiers, and
- 5% limit for loans with LVR above 60% for investors.
To:
- 15% limit for loans with LVR above 80% for owner occupiers, and
- 5% limit for loans with LVR above 65% for investors.
We are consulting on the implementation of this proposal over the next two weeks with registered banks. The change, if effected, will be made via a change in banks’ Conditions of Registration. Members of the public wishing to provide feedback on the proposal can do so by emailing rbnz-info@rbnz.govt.
nz. Our May 2023 Financial Stability Report will detail our latest assessment of the current and emerging risks to the financial system.
117 Comments
Haha yeah. But this is a strange comment
"while house prices may continue to fall, the probability of a further large correction in house prices has reduced."
With inflation still running high (and expected to take a year or more to be back in the target range) and current deficit a mess... Its going to take one black swan event to put a massive hole in the housiñg ponzi.
But hell what are the odds of another unforseen event.. last 10 years or so have only seen a global pandemic, GFC, ukraine war, brexit, trump elected, climate catastrophes... and a cold war emerging between a dictator and the usa and uncontrolled AI development
Borrow borrow borrow guys.. buy into the ponzi. Crash risk is reduced .. but if it happens you know they will say.. it wasnt foreseeable by us..
(If u do feel a need to borrow maybe consider to bid for an unfloodable nuclear bunker with medical grade air supply and no externally connected tech -> those properties may rise in value quite rapidly lol).
Actually, if a housing market that was at 10x incomes falls 15-20%, the likelihood of further falls has increased, not decreased.
It's a bit like saying;
'a snow drift on the mountain above us started moving yesterday, so it is safe to say the risk of an avalanche today has reduced'
Um no....this isn't true.
Yeeeeeah this is kind of nonsense though isn't it?
Momentum is a thing in the short term, fundamentals drive long term movements.
Although I suppose you'd say that the fundamentals suggest average house prices should be half what they are, and in light of that momentum will carry us there.
Might be the start of a transition to using DTI's over LVR's as a prudential tool for managing lending risk - which could be more appropriate if/as prices fall further.
(i.e. the futher prices fall and the closer we get to the bottom (wherever that is...) the risk of being in negative equity reduces and hence the less need there is for LVRs)....that said, there is still scope for significant price falls if we are to return to price to income rations of 4-5, so lending to people with these modified LVR settings is still risky (in my opinion) It opens up the door for more owners to be in negative equity in 12 months time if price falls continue at the same rate as the last 12 months (which is entirely possible).
I'd look at these changes as tinkering around the edges so wouldn't get too outraged. It was worthwhile (getting outraged) in 2020 with the LVR changes they made then, as that wasn't tinkering around the edges...it was proper madness that allowed huge amounts of risky debt to be issued which ,with prices down now 20% in some markets, could be/is well and truly in negative equity. That wasn't smart lending or prudent supervision of our retail banks.
Addy, look we will keep you in the job because you are great at compliance with our need to " know what's best for the people"
Thanks Robby.
Now Addy, we need to look hot going into the election and we need to get young FHBs into houses or we lose votes oopps I mean we create a new jeprodized youth
No problem Robby. But many FHBs are using the system, via thier parents wealth, to great advantage!
Ignore that Addy. It's about the votes oops I mean peeps
Perhaps the hope is that cashed up investors are willing to step up and take the losses from struggling FHBs who can no longer afford repayments.
The recent FHBs may no longer have any equity left in the property they purchased in 2020-2021, but at least if an investor buys with a 35% LVR, they should be able to survive even if the market drops another 10-20%, while they FHB may not be able to.
This thinking might sound crazy...but having worked in Wellington...these types of discussions could have been taking place behind closed doors.
i.e. 'lets use investors equity to take the hit in more house price falls that we're forecasting - as opposed to putting even more FHBs into negative equity'.
Because lets face it, giving FHBs more debt by looseing up LVRs doesn't make one shread of difference right now. If they can't afford a certain amount of debt at current LVRs, they can't afford even more debt with an even greater LVR!
The Ponzi must be saved
That could be the only explanation. Doesn't really make any sense unless they're terrified that the nudge tactics that they've built around the Ponzi have lost their mojo or that their private bank mates are slowing down dramatically.
Let's see how the sheeple react. Not the best time to load up on private debt one would think.
I suspect this is correct.
But it is interesting to consider why the RBNZ is doing this. Their mandate is price stability, maximum sustainable employment and financial stability. With inflation at twice the upper bound of the target range, and current employment above what they consider the "maximum sustainable" level they aren't doing this to achieve either of these goals - lowering LVR's works against these two objectives.
So the only reason they can justify doing this is to meet their "financial stability" objectives. Yet they have repeatedly claimed banks can withstand 40% house price falls. So why intervene now?
Its also interesting to compare with how slow they were to remove stimulatory polices during covid, even when it was clear the economy was returning to normal and inflation was running out of control. Now we have inflation still out of control, the economy still running too hot, yet they are already trying to add stimulatory policies back in.
Yip agree - if they are widely removing LVR restrictions while dropping interest rates, then I think that is absurd (aka 2020). That just creates a feeding frenzy and creates huge risk of people finding themselves in negative equity (such as what is playing out right now...and as many commentators on this site were warning about in 2020-2021).
Bu if interest rates are rising/steady, and they make very small changes like this, I don't think it makes much difference really to the overall market risk.
Plenty of shortages in the broader economy to absorb young professionals with sought-after skills, albeit without the crazy pay and perks offered by consultancies and tech firms.
"Non-consulting" colleague has picked up "consulting" contracts with KPMG because his business delivers meaningful content and insight. This kind of work might have previously been handled in-house with poor outcomes. Now it's being outsourced and you can lay off a few people on the KPMG side.
Concur, if they can't afford the stress test rate at current LVR settings for a given amount of debt...what good is offering them more debt that they certainly won't be able to afford under the stress test rate...
If interest rates were falling my view would be different as reducing LVR settings while interest rates are falling is like creating a feeding frenzy for starved vultures. Aka 2020-2021 and just creates speculative froth in the market and is the opposite of fostering financial stability (i.e. the role of the central bank...)
TBH, as much as I think it's stupid, it may benefit me and others in my situation: high income, but deposit under 6 figures.
They're trying to get FHB back into the market. We're looking, but most asking prices [sadly, wife works in Auckland] are still almost double what we would be willing to pay [even at the current stress tests, and we self-assess at higher rates].
Do you really think now is a good time to buy in?
The problem seems to be that NZ now has minimal local control over the main factors that influence house prices and interest rates. for the last 10 years or so we have been able to independently print cash and lower the OCR without too much impact on inflation and rates. And house prices shot up.
But now we cant print cash or lower rates... and the probability of external events and internal inflation leading to further house price falls and further rates rises seems to be high. In which case better for FHB to wait and hope there is a point in a year or so where deposits are lower due to house prices being lower (not dti) and rates are peaking or start to fall. All in all a better situ.
'They' will try to say things to get anyone who can buy to buy in the meantime. But as for the last 2-3 years... its likely better to wait.
If you can afford it long term, it's always worth buying, imo. Even losing equity before resale is better than losing 100% of rent.
For us, the problem is locality - my wife wants to stay at her job. For that, we currently rent a large 5-bed in a central suburb. The asking price on a similar property in a similar neighbourhood is well beyond what that rent payment would support. So it makes sense to rent for now - though we could easily purchase elsewhere if we wished.
As long as interest + potential lost equity < rent, it's a good time to buy (as a FHB). Which is not there for Auckland, by a long shot.
Huge amounts of debt in mortgage’s are moving from fixed low rates to 6.5% or above which will cause many who were over leveraged into financial difficulties, house prices are probably going to fall much quicker as panic set’s in. People who borrowed a million will be paying 65k in interest per year rather than 25k
by Yvil | 26th Apr 23, 9:58am 1682459888
It could be argued that the LVR's core purpose, is to protect the banks, rather than the borrowers. But my point above still stands, at a time of falling "V"alues, it does not protect the banks to issue more loans at low LVR's
Such was the case in 2020 but Orr got on his platform and desperately pleaded for the banks to LEND, LEND, LEND in order to avoid a depression. Nobody seemed to care about the risk this created - actually if you warned against it you got laughed at by many for being a 'doom gloom merchant'.
And yet, here we are, with prices having fallen much further, and with far more risk, and yet Orr is no longer worrying about a depression, even through the thing he was worrying about is now playing out....why, this logic doesn't make any sense?
This is the first time in 100 years that in the US, M2 money supply growth is negative. The only other times this has occurred, it resulted in depressions with >10% unemployment.
https://pbs.twimg.com/media/Fulx9tqWcAYfX_2?format=jpg&name=large
Probably to achieve diversity in the lending book - ie. not too much weight in high credit risk. The RBNZ argues that the 'risk has decreased' so can allow more high LVR origination.
I think most would agree this reasoning is a sham. Through the smoke, my sense is that this is a desperate plea at creating an injection of demand into the collapsing ponzi.
-SMG.
by Yvil | 26th Apr 23, 9:55am 1682459712
What's the core reason for LVR's existence? Is it not to protect borrowers?
If so, it makes no sense at all to reduce the LVR at a time when the "V" component, is dropping like a stone. This will only make new, weak borrowers, more vulnerable.
More to protect the banks than the protect the borrowers. The borrowers are sacraficial (see those who they lent money to in 2020-2021 who are now in negative equity and they couldn't care about)
by Yvil | 26th Apr 23, 10:40am 1682462456
IO, do you have to rebuke every single post I make? You seem really obsessed with my comments.
Do you want me to answer this given it has a question mark? (which is confusing because perhaps if I do reply you will again feel rebuked?)
I'm adding more data to your perspectives, similar to the community notes feature on twitter that clarifies half/partial truths.
Contact the interest.co.nz team if you want me banned for adding more perspective to your comments.
Have a nice day I'm off to do the lawns which I'm also obsessed with (lol)
Were you aware Yvil that banks had been doing much more high LVR fhb lending at least one month ago. I commented on that and taking a positive view and got shouted down
It says two things: that fhb don't agree with the recent asb survey saying it's the worst time to buy since 2009. And that the Aussie banks are quietly confident on the future housing market direction. Banks have pretty well always taken a conservative and risk averse view of a borrowers capacity to service a mortgage.
Kia kaha
by HW2 | 26th Apr 23, 10:37am 1682462224
'Their existence depends... '
Yes you are quietly confident about this too
Residential property lending is the core business so yes. Just like any other company, their existence depends upon their core stream of income doing well. And they aren't going to say the opposite (publicly) are they?
As the RBNZ said, they feel borrowers are less vulnerable now as we are near the bottom of house prices and the top of interest rates. Of course they could be wrong on those assumptions, but that is always the case with any LVR move.
The risk involved when buying a house now is a lot less than it was 1 year ago.
Ah yes. Been observing from the sidelines over the past few months. There no doubt has been some paper loses for most people, but the tide is slowly changing. Global and local inflation is trending downwards. I’m seeing more people at open homes, most to be buyers have more or less accepted that the market is at the bottom if not very close to it. This correction was necessary as increases since 2020 were ridiculous and unsustainable. Market in Australia is picking up too. The potential of interest deductibility being reinstated is high if national get in. And lastly immigration has picked up too. Will be a tough pill for some DGms to swallow who were hoping for another 30-40% drop it prices.
The motto always is - be calm during the storm, this too shall pass and most importantly don’t get caught up in “todays” headlines.
Good investment is always about swimming against the tide. If you feel it's the right time then pull the trigger. Doesn't really matter if you are a bit early or a bit late, the fact is that we are approaching 2 years since the downturn began so why not if your buying something you'll hold for 5 to 10 years?
Go with your gut and learn from whatever the outcome is but from reading these comments I'd be prepared to bet on you over the others worried about future downfalls.
I would say that a big chunk of dgm have a vested interest somehow. They tell otherwise, such as I own a home which I am happy with, am not buying another. Then later they tell how they want their brother, children or grandchildren to be able to afford a home. They are not impartial
Nah - it's not different this time
It's always the same, boom and then bust. Always has been, always will be.
And the bust thingy is just getting started.
I'm in the Bagrie camp. The falls don't stop until investors return... and why would they when they can get 6% passive in a TD?
But you should keep reading and believing Phoney Tony if it helps you sleep. He's bound to be along with a good spin on all this any second.
We have been looking to buy in Whangarei. There has been a surprising increase in the number of people I have seen at open homes - but the vast majority have been older couples. The few younger people I have seen are often accompanied by someone who looks to be a parent. I wonder how many of those potential buyers are going to not be able to proceed when they realise there is a lack of FHB who are willing and able to get a loan to enable the older folks to sell their place and buy the new property they have identified.
They are doing this because the market is effectively illiquid right now. My hypothesis is they want to create some capacity for people to purchase to limit/slow the fall in price. But the fall in price is driven by the illiquidity of the market. If the illiquidity remains, the further the prices will fall.
The Reserve Bank, implicitly, has a role of ensuring markets function by having sufficient liquidity. Whether that is dollars in the Till machine, Riskless Bonds or Housing market liquidity.
If we really wanted to push it, I personally wonder whether the RBNZ allowed the housing bubble to pump as high as it did on purpose, such that political momentum would build to place permanent regulatory solutions on the housing market, limiting such bubbles.
Its not the RBNZ job to protect FHB's from the ravages of this correction. Their job is to protect the financial system. It would seem that in desperation, by opening the spigot even more FHB's will become acceptable collateral damage to protect the system as a whole. These kids also have parents, probably well established financially who will want to help their kids. Best that they wait and think twice to protect their finances. For the financially wise, rather than take on bad debt, there are simply other ways of saving and achieving financial security. Despite falls to date, houses are still seriously overvalued.
While there is a lot of emotion in FHB decisions, they are not stupid. The spruikers are talking a turning point, well it did not comeout in March data, and is not occuring at Mortgagee sales, lets just wait and look at facts like the April sales data, turning in winter... I doubt it. A turn is more likely to arrive in Spring, but so too will a huge Pent Up Supply, incuding stuff pulled as offers where 20% below asking.
I see the S and P 500 took the stairs up all last month, but is now taking the elevator down.
Interest editors, could you put up a monthly chart of mortgage borrowing over the last 4 years, last month looked.... Interesting
Yes, for the hopelessly vested, a sustainable solution that will lead to a more stable market for all cannot involve anything less insane than another torrent of cheap money coupled with no - or low deposit loans. Its no wonder we have crashes.
https://www.stuff.co.nz/business/99408539/reserve-bank-warns-its-not-ou…
The RBNZ performed this same poorly thought flip trick in 2017 too.
Don't be tempted First home buyers. You will end up regretting it and just help the banks and a bunch of greedy property investors quit their over leveraged property and end up suffering yourself. Wait until they are panicking and the banks are well and truly into repossessing their properties and desperately trying to pass them on to new buyers. Wait until you see the whites of their eyes.
If that doesn't work and the government finds other ways to re-stoke the housing ponzie and stop what should be a natural and long overdue correction to sane values; leave the country. You probably should anyway, because the government will probably try to stop a correction. However all ponzie schemes end eventually and the longer it takes, the worse the disaster. You don't want to be caught up in that, It could financially ruin the rest of your life. Those nice Australians are very inviting. Avoid Sydney or Melbourne as they are just as crazy as NZ.
Why do commentators keep thinking that the RBNZ have some kind of responsibility to regulate house prices?
They are just applying their LVR tool as it was intended. They think this is the bottom of the housing cycle, and there is less need to protect people and banks from themselves at the bottom of the cycle than the top.
If they never reduce the LVRs then they are no longer a tool that can be used when needed.
Imagine the backroom arm wrestling going on between the RBNZ and groups like Business NZ, the bankers association, Simon bloody bridges and the chamber… oh and the national party patsies.
more debt…. yeah that will work!
let’s not let otara drop back below a mill!
classic
Their job is to promote financial stability.
Housing price crashes are a risk to financial stability.
This has potential to (slighty) soften or slow those falls, reducing that risk.
Despite the many issues with RBNZ performance in last few years, I think this is the right move on balance to promote financial stability (notice it's not financial sustainability...)
All part of the cycle, nothing will change, all controls on and off whenever suits. Still a couple of years to go until property market will edge up in any meaningful way so no rush.
At the moment people are still busy with their overseas travels, immigrants will continue to flood in, it will be all go again.
Kainga Ora already underwrites loans for FHB at 5% deposit. But unfortunately the 150k income cap for a couple is unrealistic at current interest rates. If you can find a new build for 875k in Auckland they would give a couple 20k and let them tap Kiwisaver for the balance of 44k deposit. But they still need to borrow 831k at 6.5% and that will suck up 1200 a week of after tax income. Some one on 75k only takes home $1075 a week. So a couple at the max income cap would be left with $950 a week to cover everything else.
Policy announcement pre election. The FHB grant income cap will be raised to 180 -200 k for a couple.
From the Facebook property page today….god bless
Hi fellow investors! I've just bought a new build townhouse which will get me an annual rent of $25k. My annual interest only expense will be $35k. So I'm assuming I don't have to pay any taxes, can someone please confirm? Is there any value in still hiring an accountant?
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