By Gareth Vaughan
The Reserve Bank has suggested it may implement a watered down version of caps on residential mortgages with high loan-to-value ratios (LVRs), and disclosed it's not keen on exempting first home buyers from any LVR restrictions nor on targeting LVR restrictions at regions, such as Auckland, where house price rises are particularly strong.
The Reserve Bank says exempting first home buyers would only be possible if they weren't the ones driving the risky borrowing LVR caps were designed to combat. And although targeting LVR restrictions at particular regions may be feasible, it would "entail significant practical difficulties and could create other distortions."
Meanwhile, the Reserve Bank has also suggested "a variant" to the LVR restriction it has previously proposed, whereby a limit would be set on the share of high LVR lending banks could do, enabling them to continue providing high LVR loans to "credit worthy" borrowers.
The central bank and prudential regulator of banks made these comments in its latest bi-annual Financial Stability Report.
Asked by interest.co.nz what significant practical difficulties and other distortions were being referred to in terms of applying regional LVR caps, a Reserve Bank spokeswoman said; "Administration considerations would include collection of LVR data on a regional basis, and distortions to be aware of would include the risk of shifting high LVR lending towards parts of the country without such restrictions in place."
The latest Real Estate Institute of New Zealand figures show the national median house price topping the NZ$400,000 mark for the first time ever with the Auckland median price at a record high of NZ$562,000, representing 13.5% year-on-year growth.
The Financial Stability Report looks at the Reserve Bank's proposed macro-prudential tools and provides some response to issues raised in submissions on its consultation paper. It's looking at the potential use of four so-called macro-prudential tools to lessen risk in the financial system during times of rapid credit growth, rising leverage and excessive growth in asset prices. The tools - as proposed - would only apply to registered banks, wouldn't affect existing loan agreements, and would be used temporarily, if at all. The four tools are:
- the countercyclical capital buffer, effectively banks holding more capital during credit booms;
- adjustments to the minimum core funding ratio, altering the amount of equity, retail funds and longer-term wholesale funding banks have to hold;
- sectoral capital requirements, or increasing bank capital in response to sector-specific risks;
- restrictions on high LVR residential mortgage lending, which, for example, could mean borrowers having to have at least 15% or 20% equity.
Finance Minister Bill English said in February he expected to sign a memorandum of understanding on the macro-prudential tools with Reserve Bank Governor Graeme Wheeler by the middle of the year.
The Reserve Bank says much of the focus in the submissions responding to its consultation paper was on the possible use of LVR restrictions.
"Key concerns were around the potential adverse effects such restrictions could have on first-home buyers, small businesses, and the Canterbury rebuild. Some submitters suggested that LVR restrictions could best be applied with exemptions for some borrowers or targeted at particular regions where high LVR lending was more prevalent," the Reserve Bank says.
"A variant of the LVR restriction proposed in the consultation would set a limit on the share of high LVR lending that could be undertaken, providing banks with scope to continue to provide some high LVR loans to credit worthy borrowers."
Asked whether the Reserve Bank had decided where such a limit could be set, such as at 20% of all residential mortgage lending per bank, the spokeswoman said;. "The Reserve Bank has not decided where to set a limit on the share of high LVR lending, if one was imposed."
"We are currently considering the feedback on options around LVR restrictions received as part of the recent consultation process and have yet to make final decisions. A summary of submissions is being prepared and will be published shortly, together with an overview of the revised policy framework," the spokeswoman added.
The Reserve Bank says about 30% of new residential mortgage lending is at LVRs over 80% at the moment, compared with about 25% in late 2011 to early 2012.
Meanwhile, the Reserve Bank suggests it might be necessary to extend its macro-prudential tools to non-bank lenders, who could step in to replace high LVR lending by banks should LVR caps be enforced on bank lending. It says this is an issue it's considering.
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10 Comments
Mr Wheeler is not doing all bad, in my view; although the proof will be in the pudding over the next few months.
There is both talk, and at least some action, to cool the housing, and presumably farm markets.
He has dabbled at least in the forex marlkets; although in my view would take the risk out of it, and be more effective if he was in fact bolder, made some larger bets; and was loud and proud about it. Nevertheless, as someone else pointed out, something is not nothing.
The above actions give him flexibility to cut the OCR if needed, without affecting housing. I thought it was necessary to cut, but today's unemployment number gives hm fair reason for pause. If the exchange rate continues to climb; and he doesn't want to invest more in forex bets, then he should cut; or deflation will start to be a risk.
The following link also suggests to me that our foreign borrowings may not have got worse over the last 4-5 years, as I thought they had. May be misinterpreting what this means. I worry more about increasing foreign exposure, than internal fiscal deficits; but this suggests they have not got worse. Could be that we are selling more assets, or all the exposure is through the commercial banks. Still, may be good news to me at least.
http://www.tradingeconomics.com/new-zealand/government-external-debt
The description attached to the graphic you linked seems faulty - check RBNZ breakdown
I can see the value in altering the LVR to combat the speculative frenzie. The cruel part is that it makes it even tougher for first home buyers who are increasingly in a poverty trap. Would it not be better to exempt first home buyers. Of course the correct and most direct course of action is to fix up our highly disfunctional supply market and remove the corrupt blockages to a free market in land and building materials. Stoping immigration and foreign purchases would also remove the imported demand; neither of these are needed or good for the long term health of our ecconomy.
If you are going to have the scheme it has to be across the board, no exceptions, otherwise you will just challenge the paper shufflers to create schemes where the money looks as though it is being borrowed for a region outside of the restriction but gets channelled inside it.
The only way to avoid the dilemma with the FHB is to tax rent seeking rather than labour. After all that is ultimately what is behind all the property speculation in the first place, the aquisition of unearned (and untaxed) rent by way of asset price inflation. It seems to me that you can't avoid this issue.
The RBNZ it would appear is now in the process of capitulation to forces deemed to have more infuence than common sense should allow.
The Governor after doing what was required in terms of rhetoric sent a clear message to the Banking Fraternity on concerns of the overheated property markets, and the realistic level of bank exposure as a consequence.
It was more of a "well dont say I didn't warn you "kind of jawbone public repremand. Now that it has become a matter of implementation the rethink begins.
Surprised, not not at all, nor would many here be, we can only speculate what the Banking Industries response to Wheeler was, but my guess goes like this ...
In Short...you rock this boat ,we all end up in the drink, the CHCH rebuild, the expansion of Auckland, the source of the reduction in unemployment , all in the drink, so you just go back rethink it, hose it down , do whatever facesaving things you need do, and leave it to us to set the levels and apprise you of what is acceptible...capiche?...Good Man.
It's business as usual, until it's not....Irish logic post GFC.
MSM obliges with free infomercials just to confirm it's business as usual, until it's not - as you noted.
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