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Low equity mortgage lending hits highest level since 2013

Tuesday 28th August 2018

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Low equity mortgage lending hit the highest level in July since the Reserve Bank imposed loan-to-value ratio restrictions in 2013, and could dampen expectations of a rate cut.

Central bank data Monday showed loans to non-investors with LVRs above 80 percent accounted for 10.2 percent of total lending in July versus 8.6 percent in June. The level was the highest since the central bank first moved to cool the housing market in 2013.

The Reserve Bank implemented the curbs to discourage banks from extending credit to riskier borrowers. However, it eased them at the beginning of this year as housing market pressures showed signs of abating. Currently, only 15 percent of new loans to owner-occupiers can have deposits of less than 20 percent and just 5 percent of loans to property investors can have deposits of less than 35 percent.

At the August rate review, the central bank kept the official cash rate at 1.75 percent and pushed out the timing of the first rate hike. Governor Adrian Orr reiterated that “the direction of our next OCR move could be up or down.”

Markets are now pricing in a 32 percent chance of a rate cut by next August. 

Annette Beacher, chief Asia-Pac macro strategist for TD Securities, said the "healthy mortgage growth via high LVR loans should mitigate any appetite for OCR cuts, even if inflation is lingering below target for too long." She also said the "leap" in high LVR loans could "threaten future stability." 

ASB Bank chief economist Nick Tuffley said the share of high LVR lending should be rising given the central bank eased the restrictions. "What is likely to matter more for monetary policy is whether house prices reaccelerate (and potentially boost the pace of consumer spending) and whether borrowing reaccelerates."

Tuffley said the key risk for the RBNZ that could trigger a rate cut is slower gross domestic product growth than expected. "If that slowdown did occur it would outweigh the risk of potentially boosting the housing market," he said.

Bank of New Zealand head of research Stephen Toplis said the increase in highly-leveraged lending is due the central bank relaxing the restriction. Given Orr voiced concern the softer-than-expected housing market could weigh on GDP growth "it may actually be relieved, rather than concerned, if the housing market picks up a bit," he said. 

Capital Economics chief Australia and New Zealand economist Paul Dales said, however, "in the current situation I would have thought the RBNZ would be reluctant to do anything that boosts house price inflation and prompts households to take on risky loans."

That said, he noted the central bank could cut interest rates and tighten restrictions on riskier lending to mitigate the impact on housing. "But to do that I think the outlook for economic growth and the labour market would need to deteriorate dramatically," he said. 


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