LVRs relaxation unlikely to stoke housing risks: Fitch

Friday 30th November 2018

International ratings agency Fitch Ratings says the Reserve Bank’s further loosening of loan-to-valuation restrictions on banks’ mortgage lending is unlikely to have a significant impact on the housing market.

Fitch says the LVRs imposed from 2013 have helped cool the housing market, halving annual house price inflation nationally to 5 percent and from an average of 15 percent in Auckland between 2013 and 2016 to 1 percent in the year ended October this year.

“We expect only modest gains of 3 percent per year in 2019-20,” the ratings agency said.

“Housing supply is still constrained and low interest rates will continue to support demand but the recent ban on most non-residents purchasing a house will act as a drag,” it said.

“A sharp housing market correction remains a possibility with price-to-income ratios still high, but it is not our base case and slowing price growth has dampened risks.”

On Wednesday, the Reserve Bank said it will ease the LVRs from January when it will allow banks to increase their lending to borrowers with less than a 20 percent deposit to up to 20 percent of total new mortgage lending, up from 15 percent currently.

As well, the deposits investors must have has been eased to 30 percent of a property’s value, down from 35 percent previously.

Although banks are allowed to lend up to 5 percent of total new lending to investors with smaller deposits, that level is so low as to effectively bar such lending.

The central bank’s first easing of LVRs had been from Jan. 1 this year.

Even with the second easing, “we still view them as relatively tight and do not expect a significant easing of lending standards in the medium term,” Fitch said.

“The share of high LVR mortgages in banks’ total new residential mortgage commitments has increased slightly this year and could edge up further in 2019 following the latest easing,” it said.

“However, lending at high LVRs is likely to remain far lower than before restrictions were first introduced in October 2013."

Therefore, “we do not expect the changes to have a meaningful impact on the credit profiles of Fitch-rated banks”

Ahead of the first LVRs from October 2013, ASB Bank had been the most exposed to high LVR lending, largely reflecting its origins in Auckland where house prices are significantly higher than in the rest of the country.

In the June quarter of 2013, a whopping 73.4 percent of ASB’s new mortgage lending was to customers with less than a 20 percent deposit.

By the six months ended June this year - the Reserve Bank dropped the requirement for banks to produce quarterly disclosure statements from the March quarter of this year - ASB’s lending to people with less than a 20 percent deposit had dropped to just 7.5 percent of new lending.

(BusinessDesk)

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