Thursday 12th September 2013
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The Reserve Bank expects to see the impacts of its restrictions on low equity home loans within six months, which it hopes will take the sting out of a heating property market in the country's two biggest cities, Auckland and Christchurch.
Its speed limits on high loan-to-value ratio home lending, which is essentially a loan of more than 80 percent of a property's value, kicks in on Oct. 1, but it would be "well into next year" before assessments could be made, deputy RBNZ governor Grant Spencer told Parliament's finance and expenditure select committee.
"There are transitional issues in terms of the banks, and we've given them a six month period initially to confirm with the new restriction," Spencer said. "It will be well into next year before we'd be able to start making fair assessments of the full impact."
The Reserve Bank predicts the restrictions will trim the annual pace of national house price inflation by between 1 percent and 4 percent, and governor Graeme Wheeler told a media briefing in Wellington this morning that "most of the impact will be over the next 12 months."
Wheeler told politicians at the hearing the rapid drop in house prices in the US caused by the fall-out of the sub-prime and global financial crises left about a quarter of 50 million mortgage-holders in negative equity, where their property was worth less than they owed.
"It just creates enormous human distress, not to mention all the output and employment issues as well, just seeing people with very low deposits just wiped out by major house price adjustments," Wheeler said.
Spencer said that with interest rates set to increase next year, a drop in house prices would put households at risk, threatening the wider financial system and "will put pressure on anyone who has a mortgage."
Wheeler announced plans to impose the loan restrictions last month. They will limit high LVR lending to just 10 percent of banks' home loan portfolios. The idea is that the restrictions will stifle demand and take some heat out of the Auckland and Christchurch housing markets, which have been bubbling away due to a lack of supply.
Banks increased their amount of high-LVR lending to about 30 percent of new loans from about 23 percent in late 2011, although the rate of increase has slowed dramatically this year.
The Reserve Bank estimates the net amount of low equity lending will be reduced by about half as the policy forces some potential borrowers to save longer to build a larger deposit, and should reduce turnover in the market.
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