ANZ economists believe the new lending 'speed limits' will have more of an effect than many are expecting

The forthcoming "speed limits" on high loan to value lending are likely to have more of an impact than many are predicting, according to ANZ economists.

The Reserve Bank announced last week that it is putting limits on the amount of high LVR lending banks can undertake. Many economists and market commentators have already expressed the view that these measure won't have much of an impact.

But in their weekly "Market Focus" the ANZ economists said they "tend to disagree".

"While some have deemed the October introduction of high-LVR speed limits on mortgage lending as likely to have a minimal impact, we do not. Not only are actual borrowing costs moving up as a consequence of forthcoming changes, but we also expect the quantity impact to hit home," they said.

The economists came up with several reasons to back up their point of view.

"The "price being charged in the high LVR space will move up too," they said.

"Back in March the RBNZ flagged an increase in regulatory capital required for high-LVR housing lending, with this set to kick in on September 30. This will result in an increase of regulatory capital for housing loans of around 12 percent."

This was a cost to the banks that would need to be passed on.

'Rigorous application'

"One outcome of such changes will likely be the more rigorous application of low equity premiums and low equity margins," the economists said.

"These equate to an interest rate increase for riskier lending. And we suspect gone are the days when banks will offer up huge cash incentives or gimmicks, such as the latest tech gadget with each mortgage."

The ANZ economists also talked about the "huge" volume of mortgage pre-approvals that the banks now have to manage.

"A pre-approved loan is a legal contract that can be alive for six months. Looking at weekly mortgage approvals data over the preceding months suggests this 'pipeline' could be substantial," they said.

"That's an asset (new business) but it’s now also a liability: there will be some uncertainty as to how these pre-approvals will roll off, and banks will need to manage this uncertainty. We wouldn’t be surprised to see tweaks to lending criteria. Those pre-approved high-LVR loans that 'confirm' will likely end up facing the differentiated pricing discussed above too."

The economists also made reference to the "plumage" of the RBNZ Governor Graeme Wheeler.

Neither a hawk nor a dove

"He's not a hawk or a dove," they said.

"He's the one with the shotgun who likes to get things done.

"If LVR restrictions don't work he'll: a) tighten them further or b) use another prudential measure or c) raise the OCR harder and faster. The latter may not be his preferred strategy but it is most certainly still in the toolkit."

The ANZ economists pointed out that banks had already started to tighten lending criteria and back off in the high LVR space before the final announcement.

"That's the credit channel of monetary policy at work: it's hugely relevant for the traditional monetary policy transmission mechanism."

'Pretty pointed'

And the fifth of the five reasons given by the economists for why the LVR policy may have more impact than expected, was that the RBNZ Governor was "pretty pointed in terms of comments that he expects bank executives and board members to operate within the spirit of the new regime".

"Those are not the nuances of a regulator who wants to be mucked around."

However, the economists said all this did  not mean LVR restrictions and other changes were a silver bullet to housing shortages.

"They will certainly not cause 30,000 new Auckland houses to pop out of the ground. They are tools that merely buy the RBNZ time before the supply-side response starts to kick in."

The economists also expected - as other bank economists have suggested - that the new measures will be subject to "the law of unintended consequences".

"Disintermediation towards more lightly regulated lenders is one risk. Also, a side effect of risk based pricing could be lower mortgage interest rates than otherwise for low-LVR lending as banks chase borrowers with high equity."

Increases for all

They said, however, that given the current drift higher in fixed mortgage interest rates, which was largely courtesy of United States monetary policy, overall interest rates seemed "likely to continue to increase for all borrowers, just at different speeds".

"We will be watching the deposit space closely: it’s one bellwether of future mortgage interest rate moves."

The ANZ economists said that more restrictions on the credit channel of monetary policy – plus long rates rising courtesy of the US Federal Reserve – meant less pressure on the traditional NZ monetary policy through the Official Cash Rate.

"This is a key reason we’re not expecting the RBNZ to be heavy-handed with the OCR until 2015 (not to be confused with saying that the OCR will not rise sooner: it will!).

"Moreover the RBNZ is likely quite chuffed with the lift in long-term fixed rates in the housing arena: it’ll keep borrowers chasing the front (cheapest) part of the curve. This is where the “specials” remain.

"The RBNZ will thereby get more bang for its buck when it finally decides the time is ripe for an OCR hike, which means they can afford to be patient."