Westpac economists see RBNZ relaxing its 'speed limit' on high loan-to-value lending to get closer to original targeted 15% limit

The Reserve Bank might announce a loosening of the "speed limits" on high loan-to-value lending as soon as this month, according to Westpac economists.

Westpac senior economist Felix Delbrück said in the bank's latest "Credit Check" report that he "wouldn’t be surprised" to see the RBNZ "recalibrate" the speed limit soon "simply to achieve its original 15% target".

The LVR restrictions, in place since October, mean banks are limited to committing no more than 10% of their new mortgage lending to high-LVR customers. High-LVR customers are those defined as borrowing more than 80% of the value of their house.

Some types of lending, however, are exempted from the 10% limit. Exempted lending categories include lending made under Housing New Zealand’s Welcome Home Loans scheme, refinancing of an existing high-LVR loan, bridging finance or the ‘porting’ of a high-LVR loan between properties. Then in December the RBNZ announced that it would exempt new builds as well, following strong lobbying from the building industry. This exemption was backdated to October.

The RBNZ had believed that the 10% limit, plus exempted loans, would produce an effective limit of around 15%. However, figures for the first six months of the LVR restrictions showed that banks' high-LVR commitments in that period had fallen to just 5.6% of total commitments, including exemptions, and around 6.8% before exemptions.

Recently the RBNZ expressed surprise at how low the levels of high-LVR lending had fallen and said one of the reasons was lower than projected use of exemptions.

RBNZ Deputy Governor Grant Spencer said in announcing the six-monthly figures this week that the central bank's "initial assessment" was that restrictions on high LVR lending had helped reduce house price inflation.

"A more in-depth assessment of the policy and its impact on the housing market will be included in next month’s Financial Stability Report," he said.

The Financial Stability Report is to be released on May 14 and would provide an ideal time for the RBNZ to make any changes to the LVR regime.

In a speech in March Spencer strongly affirmed that the LVR limits were not meant to be permanent and they would be removed "once housing market pressures have moderated and when we are confident there will not be a resurgence in house price inflation".

For the first time in four years the RBNZ has this year unholstered its main weapon against inflation, the interest rate hike. Already there have been two increases in official interest rates, in March and again last month, with more expected.

Westpac's Delbrück said that as interest rates rose, credit growth may remain subdued without the need for LVR restrictions.

"So the Reserve Bank may also start firming up its communication about eventual exit from the policy," he said.

"That said, any discussion of exit will probably still be fairly halting and tentative.

"Household credit growth has slowed, but not spectacularly, and a loosening of the LVR restrictions is likely to give the housing market a ‘second wind’ later this year.

"With mortgage rates rising and house prices already looking stretched, it’s been our view for some time that this second wind will turn out to be temporary. But the Reserve Bank will probably take more convincing."

Delbrück said that while the RBNZ's LVR limits had "done their job, and then some" regarding reducing ratios of risky lending, when measured against the RBNZ’s broader aim of slowing overall credit growth, the impact of the LVR restrictions had, if anything, been a bit more modest than was intended.

"The RBNZ had projected that household credit growth would slow by 1-3 percentage points. Since September, bank mortgage loans have grown at an annualised rate of 5.1% - down from 6.3% growth over the previous year," he said.

"The slowdown in total household credit growth has been more modest, with some sign of leakage into the non-bank sector and a noticeable pickup in consumer lending in the last six months or so."

He said, however, there was a "broader sense" that the LVR policy was working, "in the sense that there is little sign at the moment of the stronger economy spilling over into a renewed upsurge in debt-fuelled spending, in the way it did in the mid-2000s".

"Importantly, households have stopped leveraging up, despite stronger economic growth and much stronger confidence."