RBNZ Deputy Governor: 'Earliest date' for beginning to remove restrictions on low deposit lending will be late this year

The Reserve Bank says it will be "late this year" at the earliest before it begins the process of removing the 'speed limits' on high loan-to-value lending.

RBNZ Deputy Governor Grant Spencer said in a speech in Auckland today that the LVR restrictions, introduced in October last year, were "achieving their purpose".

"We are comfortable that the restrictions are so far meeting their objective of helping to restrain the demand for housing while supply gradually catches up. In so doing, we believe the restrictions are mitigating the systemic risk of a housing market downturn that becomes more likely as house prices and debt levels become more stretched.

"We also believe that the LVR restrictions have helped to make banks’ balance sheets more resilient to any adverse housing market shock."

However, in terms of when the LVRs may be removed, Spencer said: "We’ve stated that the LVRs are temporary, but before removing them we want to be confident that the housing market is responding to interest rate increases; and that immigration pressures are not causing a resurgence of house price pressures.  It will take some time to gain this assurance. 

"At this stage we consider the earliest date for beginning to remove LVRs is likely to be late in the year."

Meanwhile the Labour Party said the Government was missing an opportunity to "fine tune" the LVRs and apply them only to Auckland and Canterbury (see release at bottom of article).

Dampening effect

Spencer said that over their first six months, the LVR restrictions have had a dampening effect on housing that was "broadly in line with expectations".

"The easing or removal of the LVR restrictions will depend importantly on the restraining impact of interest rate increases and any renewed pressure arising from the net immigration."

Under the terms of the LVR limits, banks are restricted to committing no more than 10% of new mortgage lending to customers with deposits that are less than 20% of the value of the house they are buying.

The 10% limit was much lower than the banks had expected and the October introduction of the restriction saw them pull back almost completely from high LVR lending.

High-LVR figures shrink

Figures released recently for the first six months of the limit showed that, including exemptions, banks had loaned just 5.6% of their new commitments to high-LVR customers during that period.

There had been speculation in recent days and weeks that the RBNZ may be about to announce a loosening in the limit, speculation in part fuelled by a March speech from Spencer, in which he stressed that the LVRs were temporary.

He said that again today, saying that the restrictions will be eased or removed when housing market pressures have abated "and when we are confident that a resurgence of high LVR lending will not occur following removal".

Reduced effect

But he went on to say: "The LVRs are supporting monetary policy but they will have a reduced effect over time. Also, the efficiency costs of such restrictions will tend to increase the longer they are kept in place."

Westpac chief economist Dominick Stephens said he took the Spencer comments to mean that LVR restrictions "will not be changed in any way until late in the year - no change to the speed limit".

"However, an indicative timetable for removal of the restriction has also been set. Of course, this timetable is subject to change, particularly if the housing market takes off again. But in our view that is unlikely to happen, with interest rates rising as they are. 

"The RBNZ also commented on monetary policy. It reiterated that the pace and extent of OCR hikes depends on the data, and singled out two risks - the exchange rate and the trajectory of house prices in light of very strong net immigration. On balance, we took this as confirmation that the RBNZ is now looking at the less-steep trajectory for OCR hikes than it forecast back in March, owing to the high exchange rate," Stephens said.

Immigration concern

A recurring theme in the Spencer speech was the current strength of immigration numbers. The figures have been rising sharply and have exceeded the levels the RBNZ earlier forecast. At the current rate of monthly net inflow of migrants, the country is on track for potentially annual growth in net migration of 40,000, which would be close to record levels. Rising immigration levels put pressure particularly on the housing market.

Spencer said there were "many moving parts" to the overall housing supply shortage equation – and many risks around the prospects for reducing the imbalance.

"Probably the major risk at present is the outlook for immigration. After increasing substantially over the past 18 months, net immigration rose to 32,000 in the year to March, in part due to fewer departures of New Zealand citizens.

"The Reserve Bank forecasts this pattern to reduce gradually as economic conditions improve in Australia, which is the main destination for New Zealanders shifting offshore. However, cyclical turning points are hard to predict and there is a risk that the net migration inflow remains greater for longer, which would underpin the demand for housing."

Removal through 2015

ASB economist Christina Leung said that the RBNZ's timetable for removal of LVRS was "in line with our own expectations that the restrictions are most likely to be removed over a window from late 2014 through to mid-2015". 

"The RBNZ will not remove the restrictions unless it is confident that the housing market is slowing on a sustained basis and that interest rates will be sufficient to continue containing house prices, as well as confirmation that net migration is slowing. 

"We expect nation-wide house prices will rise 5% in calendar 2014 – with Auckland still up 9% - which suggests the risks lie more with 2015 given that Auckland is the market getting the most focus from the RBNZ. 

"We expect that migration flows will peak in the second half of this year.   There is the potential for the RBNZ to ease its way out of the restrictions when the time for relaxing comes by lifting the 10% ‘speed limit’.  But we think the RBNZ will remain comfortable for some time with the impact of the restrictions. 

"And, even though banks’ high-LVR share of new lending of 5.6% came well under the 10% speed limit over the first reporting period (October – March), there is some scope for the restricted lending share to lift very slightly," Leung said.

This is the media release issued by the RBNZ on the speech:

Housing pressures are easing gradually

Pressures in the New Zealand housing market are easing gradually but risks remain, the Deputy Governor of the Reserve Bank, Grant Spencer, said in a speech today.

“The volume of house sales has dropped considerably across the country, other than in Canterbury, and the slowdown in volume has also been reflected in prices.  Without the Loan to Value Ratio restrictions (LVRs), introduced in October 2013, annual house price inflation might be running some 2.5 percent higher,” Mr Spencer said.

Housing supply conditions have also started to improve, with a recovery evident in residential construction. In Auckland, progress is being made in freeing up the supply of buildable land and improving the consenting process. In Canterbury, the replacement of severely damaged homes is well in train after a slow start. 

However, the housing shortage remains large and significant increases in building are required in Auckland and Canterbury over the next three years.

“There are many parts to the housing market equation – and many risks. Probably the major risk at present is the outlook for net immigration, in part due to reduced departures of New Zealand citizens. We are forecasting net immigration to reduce gradually as economic conditions improve in Australia,” Mr Spencer said.

“We’ve started raising the Official Cash Rate, with the aim of forestalling general inflation pressures in the broader economy.  Floating mortgage rates could be 7 to 8 percent in two years’ time, closer to their average of the past 20 years.”

“The extent and timing of interest rate increases will depend on a number of uncertain variables, in particular the exchange rate and housing market pressures,” Mr Spencer said.

We believe that LVRs are achieving their purpose. The financial system is less vulnerable to an adverse housing shock and banks are now less exposed to potential credit losses as the interest rate cycle turns upwards.

We’ve stated that the LVRs are temporary, but before removing them we want to be confident that the housing market is responding to interest rate increases; and that immigration pressures are not causing a resurgence of house price pressures.  It will take some time to gain this assurance.  At this stage we consider the earliest date for beginning to remove LVRs is likely to be late in the year.

The Labour Party's housing spokesman Phil Twyford had this to say, in a statement:

Missed opportunity to relax LVRs

The Government is missing an opportunity to fine tune the mortgage restrictions which are locking so many Kiwis out of the dream of homeownership, Labour’s Housing spokesperson Phil Twyford says.

“Reserve Bank deputy governor Grant Spencer said today the bank believes Loan to Value Ratios (LVRs) are achieving their purpose, and with interest rates going up, these mortgage restrictions could be lifted later this year.

“Now is the perfect time for the Government and the Reserve Bank to agree that LVRs should apply only to Auckland and Canterbury, which are responsible for 90 per cent of house price inflation.

“Why should regional New Zealand continue to be punished for the Government's failure to fix the Auckland housing crisis and get the Canterbury rebuild happening?

“New Zealanders living in the regions are being hit with a double whammy. They have to meet LVR minimum deposit limits while mortgage interest rates are going up, adding thousands of dollars a year to their debt servicing.

“This is all because the Government refuses to crack down on Auckland property speculators and roll up its sleeves to build more houses.

“LVRs have been a shambles from start to finish with the Government not checking their impact on first home buyers until a month after signing off the restrictions. The Reserve Bank has also severely underestimated the effect on new builds.

“National refuses to take real steps to tackle the housing crisis like taxing speculators through a Capital Gains Tax or building large numbers of affordable houses.

“Only a Labour government will tax property speculators to take the heat out of the housing market and build 100,000 affordable homes through our Kiwi Build policy,” Phil Twyford says.