New Zealand central bank home loan limits set to go, gradually

[WELLINGTON] New Zealand's central bank year-old contentious limits on risky house lending are expected to be gradually phased out in the coming year as tame inflation and a slower housing market have reduced the need for them.

For the past year retail banks have been restricted to no more than 10 per cent of new home loans for borrowers with deposits of less than 20 percent of a property's value - called high loan-to-value ratio lending (LVR).

The Reserve Bank of New Zealand (RBNZ) reached for the macro-prudential tool to help cool a hot housing market, by slowing housing-credit growth and inflation without having to resort to the blunt weapon of raising rates, which may have stoked an already elevated currency.

Before the rules, low-deposit lending accounted for 25 per cent of banks' home loans, but in September that was 7.3 per cent, and Wheeler said they had helped ease inflation and housing market pressures. "This reduction allowed us to delay the tightening in interest rates, thereby reducing the incentive for any additional capital inflows into the New Zealand dollar in search of higher yields," he told a Bank of International Settlements conference last month.

Annual house price inflation has fallen to about 6 percent from 10 per cent a year ago, and Wheeler said the limits were worth 25 to 50 basis points of rises in the cash rate.

The RBNZ will outline the future of the LVR regime in its Nov 12 financial stability report, but they are seen to have largely done what was expected of them. "It's been very effective, it's worked well and achieved what the bank wanted, but it's served its purpose," said ANZ Bank chief economist Cameron Bagrie.

The British and Australian central banks are currently facing strong house price growth and looking for measures to cool markets.

The Reserve Bank of Australia has concerns about banks'lending practices and an unbalanced housing market, but in August, RBA Governor Glenn Stevens called macro-prudential tools the "latest fad".

Australian financial sector regulator APRA instead may require banks to hold more capital for low or no deposit loans.

New Zealand's limits have been blamed for a sharp fall in house sales, down more than 10 per cent on a year ago, as well as knocking many first home buyers out of the market.

For the real estate industry the LVR restrictions can't go quick enough. "They were too heavy handed, have hurt provincial areas, and made it more difficult for first home buyers to enter the market," said Hayden Duncan chief executive of the country's biggest real estate company Harcourts Ltd.

The effectiveness of the LVR limits was blurred when the RBNZ resumed orthodox monetary policy by raising its benchmark cash rate a total of 100 basis points to 3.5 per cent between March and July before pausing in September on the back of soft inflation pressures.

The RBNZ has always said the LVR limits are temporary and will go when it sees little risk of the housing market getting a second wind from banks returning to their old lending habits, especially if the demand is stoked by immigration gains, which hit a record in the year to September.

One analyst sees value in keeping some lending limits, especially when monetary policy is on hold again. "They won't want the high LVR share to zoom back to 30 per cent again otherwise it will require another hard clamp down," said Westpac senior economist Michael Gordon, suggesting the limit could be raised to 15 or 20 per cent of lending.


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