RBNZ's latest bulletin says banks' share of low deposit lending has shrunk more than it expected when it introduced LVR 'speed limits'

The Reserve Bank's admitting surprise at how far down the level of banks' high loan-to-value lending has sunk since the RBNZ introduced 'speed limits' on high-LVR lending in October.

In an article in the RBNZ's latest Bulletin, Lamorna Rogers, an advisor on macro-financial stability at the central bank, conceded that so far the share of high-LVR lending before exemptions was "lower than expected".

The article was based on figures for the first four months of the LVR limits. Subsequent to preparation of the article, the RBNZ has released results for February - the fifth month - and these showed that during that five months the amount of high-LVR lending was running at around 7.25% before exemptions, and under 6.2% after exemptions.

For the first four months, on which Rogers commented, the pre-exemptions figure was around 7.8% compared with the RBNZ's projections that it would be about 15%. The actual limit is 10%, but the RBNZ had calculated that exempted lending would produce a pre-exemption figure of 15%.

Rogers said the lower than expected figures partly reflected lower than projected use of exemptions, "which are averaging around 1% of total lending, compared to projections of 5%".

"It is possible that the share of high-LVR lending could modestly increase in coming months as banks adjust to the new framework."

Westpac economists said earlier in the week they thought the RBNZ might have been surprised by the extent to which banks had pulled back from high-LVR lending.

"This has raised the possibility, in our minds, that if high-LVR lending remains low the RBNZ might consider relaxing the restrictions so the portion of low-LVR lending is closer to what was originally intended," they said.

While Rogers' bulletin article didn't raise any such prospect, it did reiterate the clear message from a speech last week by RBNZ Deputy Governor Grant Spencer that the LVR limits were working, and they were seen as temporary.

She said whereas many countries applied LVR restrictions as a fixed part of their regulatory framework, in New Zealand they were intended to be used in a "timevarying fashion".

"LVR restrictions are to be used only occasionally, at those points in the financial cycle where there is a real danger of growing systemic risks leading to financial instability.

"The Reserve Bank does not intend to operate LVR restrictions in a continuous fashion to smooth the cycle, but rather aims to limit the extreme peaks in house price and housing credit cycles." 

Rogers said the weaker housing market in the wake of the LVRs was reflected in housing lending data.

"This is particularly evident in the first stage of the lending process, with the value of new housing loans approvals falling by a seasonally adjusted 7% over the three months to February.

"Changes in housing credit are slower to come through, reflecting that net credit is also affected by drawdowns on existing loans, and changes in repayment behaviour.

"Housing credit growth does appear to be turning however, having slowed from its October 2013 peak of 6.4% annual growth to 6% in January 2014," She said.

Rogers said LVR restrictions were "not a permanent tool", and the Reserve Bank was continuously monitoring their impact.

"Although some desirable adjustments to the framework have been identified, and are currently being drafted, LVR restrictions appear to be working well overall. The housing market seems to be slowing, and there is little evidence of material leakages around the edges of the restrictions.

"A better balance in the housing market will help reduce the risk of a severe housing downturn, and associated systemic risks to the financial sector and the economy.

"The Reserve Bank recognises that the policy room provided by LVR restrictions can only be temporary. LVR restrictions provide a way of restraining housing demand while working on the supply response. But in the medium to longer term, imbalances will need to be resolved through appropriate longer run policy measures, including actions to improve the housing supply."