The Reserve Bank's Loan to Valuation (LVR) mortgage lending limits appear to have put a cap on house price growth but haven't reduced the risks borrowers face from rising mortgage interest rates, according to the International Monetary Fund (IMF).
The IMF's Global Housing Watch report for the second quarter of this year, says this country's LVR restrictions "appear to have had some moderating influence on mortgage lending, expected and actual house price growth, and the quality of loan composition."
The report says the LVR restrictions have also helped to contain household debt levels.
However it also notes that even with the LVR restrictions in place, borrowers still face significant risks from rising interest rates or from an economic shock which could reduce household incomes.
"They [LVR restrictions] do not seem to have prevented a continuous deterioration of borrower households' vulnerability against debt servicing capacity risks, such as higher interest rates or income shocks," the report says.
Although the report does not specifically mention debt-to-income (DTI) restrictions on mortgage lending, it appears likely that introducing DTI restrictions on mortgage lending, on top if the existing LVR restrictions, would have the potential to moderate the risks borrowers face from rising interest rates or income shocks.
The Reserve Bank has signalled that it would like to be able to introduce DTI restrictions, but is yet to receive government approval to do so.
You can receive all of our property articles automatically by subscribing to our free email Property Newsletter. This will deliver all of our property-related articles, including auction results and interest rate updates, directly to your in-box 3-5 times a week. We don't share your details with third parties and you can unsubscribe at any time. To subscribe just click on this link, scroll down to "Property email newsletter"and enter your email address.
23 Comments
"However it also notes that even with the LVR restrictions in place, borrowers still face significant risks from rising interest rates or from an economic shock which could reduce household incomes."
Clearly this government gives a damn to borrowers who have to borrow beyond a sustainable level .. according to them is a HUGE sign of success... when borrowers go under, they will blame the rest of the world..
We still have many freedoms in this country rather than communist dictator rule.
The choice to invest in an over inflated property market is one of those choices in a free market. Many -in fact the majority of New Zealand home owners - have done very well with rapidly rising property prices and low mortgage rates. However, those who through freedom of choice who have taken the risk of buying on a rapidly increasing (and over-valued) property market with historically low mortgage rates should not being crying foul and expecting a nanny state to bail them out when prices fall and mortgage rates increase.
Take individual responsibility for what were obvious choices rather than just blaming the government.
If LTV Ratios protect Kiwi borrowers then its good that we have them in place, however there is enough evidence to support the widely held view that the market is usually right , even when it runs away with itself.
The spike in 2015/16 was a refection of a number of elements , namely unprecedented demand for housing from migrants, really cheap money , greed on the part of speculators who believe it will never end , and fear from those not in the game ..............all adding up to a dangerous cocktail .
The best we can hope for now is a soft landing
When houses get sold at higher and higher prices well beyond what makes sense based on the income those houses can generate, the market is effectively saying "we expect capital gains will keep going forever" (or at least long enough for me to flip the property in a few years). The market was wrong in the US, it was wrong in Ireland, wrong in Spain, and is looking increasingly like it was wrong in Canada. You can be sure as hell it is horribly wrong in Australia and New Zealand.
Prices can't and won't keep outpacing incomes over the long term, you can bank on it. Given enough time incomes will catch up, but show me a market where every over leveraged mug sat tight for 30 years waiting for that to happen.
@ Zombie , I agree with you , but we really need a soft landing , not like Spain or the US in the GFC .
In the meantime , I have told my 2 oldest kids to DO NOTHING , sit on their hands while the landing takes place , either prices will come down or Labour will build them a house and sell it to them at a loss .
We are now cruising at 35,000ft and everyone who got on board is now in 1st class drinking champagne, there is no landing in sight. Basically its business as usual until some massive economic event in another country creates some serious turbulence and the wings fall off, at which point there will not be enough parachutes to go around so start paying off your debt NOW.
If the IMF wish to control NZ policy could the members please come and live here and set up their political parties and stand for election like everyone else has to do before directing policy!!
What the RBNZ never put into plain language is:
Total savings by depositors in banks.
Total private mortgage debts split into various categories.
Total mortgage derivatives held and Total mortgage derivatives on sold.
Total non mortgage derivatives traded by bank.....these should be broken down further into categories.
Total other bank trading activity showing debtor and creditor balances
It is far too easy to direct fingers at mortgage holders when other bank trading activities influence whether a bank remains stable or not.
Good point, so why is the IMF concerned about us in the first place?? ... We are one of the best run economies around the western world at the moment and pretty well sheltered from the disasters they have (and create) in EU and USA and other parts of the world ...
When are we going to stop listening to Nanny State crap always trying to protect people from "themselves" ... Anyone who have over leveraged himself deserves what he gets when the tide turns around...
In my view, reports like these are a great insult to the borrowers, the Banks who lend them the money, and the RBNZ - , they are saying In utter arrogance: you guys are silly and not prudent enough to allow risky borrowing and so much debt at these interest rate levels and better get in line before it is too late cos we know best !!!
Maybe they are preparing the world for 2- 4% hike in the coming two years .... another round of money gathering ( siphoning )....
I stand to be corrected.
I think the only point where I would differ somewhat is if we end up with so much dodgy lending that it causes a bank or our financial system to collapse. I don't know if we have that much in the way of toxic lending but it would be a major problem if it did happen. No doubt there would be endless finger pointing.
If we did end up in a bail out position I would only get behind bailing out depositors and let the banks fail. That's an edge case financial disaster though.
When was the last time we heard about dodgy lending in NZ? ... the IMF is talking in particular about house lending .. and to that we all know that the main banks are really tidy and tight in their lending and over diligent re current and future loan serviceability and job security etc ... they are hardly in the reckless business of making money out of thin air like "Others" !! .. and if they were ... then DTI will not prevent them getting indulged in stupid activities like derivatives and toxic CDs etc unless sold and guaranteed by the IMF and their mates ( like what happened in 2007) .... the RBNZ can tighten and control the amount of holding capital to insure that Banks will be passing stress tests .... so mixing that with LVR and DTI in this subject is insulting our intelligence really.
We are not a banana republic!
Oh I think the IMF understand alright....
They are deliberately directing focus onto the targets they want people to look at and think that is where the problems is.
Banks don't get into trouble from a few bad mortgages anymore than any other business has bad debtors in fact banks always have access to the underlying asset related to a mortgage so don't suffer anywhere the same financial constraints of other businesses.. Banks get into trouble from their derivatives trading as that is where the bigger amount of money is won or lost ........
Bang on, only 112 Italian Banks with Texas Ratios of 100 or more to be bailed out and dear old Douche Bank with an exposure to derivatives greater than Global GDP but the international regulators and the ECB don't see any real problem now they have new printing presses able to print trillions of Euro's in the blink of an eye. Other western type countries have their presses on order.
This probably has zero to do with all this but I remember about 2 years ago when the larger counties were saying they wouldn't have currency wars to improve exports bill English was asked what he thought, I think at the time he said nz was to small to fight against the big boys, now we have had un normally low interest rates for a period of the last 2 years and now everyone's panicking, the cats out of the bag , not my fault, should of , shouldn't of, let labour get in quickly and blame them and the RBNZ
Demand side measures like LVRs can be a real double edged sword.
I know a couple of developers whose supply pipeline is pulling back, at least partly due to the LVRs hitting investors and therefore demand for new housing.
So whilst LVRs pull back demand, they also pull back supply....
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.