Wednesday 28th November 2018
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The Reserve Bank expects its latest easing of loan-to-valuation restrictions on bank mortgage lending will feed through into higher house prices.
The central bank is also reinforcing its view that all banks will need to hold more capital and that the “big four” Australian-owned banks will have to stomach a smaller capital advantage over their smaller rivals.
At the media briefing on the Reserve Bank’s latest Financial Stability Report, deputy governor Geoff Bascand acknowledged that the easing of LVRs is effectively a small easing in monetary policy and that it will encourage house price inflation.
“But this is at the margin,” and “we know that banks have used most of the increased buffer” from the last time the Reserve Bank eased LVRs from January this year.
The latest easing will allow banks to increase their lending to borrowers who occupy the homes they borrow against but who have less than a 20 percent deposit. From January, they'll be able to write up to 20 percent of total new mortgage lending to those borrowers, 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 latest Real Estate Institute data shows its national house price index rose 3.8 percent in the year ended October but that its index for Auckland fell 0.4 percent.
Excluding Auckland, house prices rose 7.9 percent.
The Reserve Bank imposed more onerous restrictions on mortgage lending in Auckland from October 2015 but those extended to the rest of the country a year later.
Reserve Bank governor Adrian Orr told journalists LVRs are here to stay and that it’s just a matter of where they will be set to lean against an over-heating housing market.
He said the Reserve Bank is working to provide a “flight path” within the next six-to-12 months of where it expects LVRs to move.
Orr reiterated that the central bank expects it will require banks to hold additional review after it completes the current review and it will release a final consultation paper on bank capital requirements in December.
Bascand said the Reserve Bank will allow the “big four” banks - ANZ ASB, Bank of New Zealand and Westpac - to continue using their own internal ratings-based models to calculate how much capital they need.
However, the central bank does plan to place a floor under how much of advantage over the other banks those models give them. The other banks, including the government-owned Kiwibank, have to use standardised models.
The way the Australian-owned banks have used their internal models has “become excessive” relative to actual risks.
The “big four” are responsible for more than 86 percent of bank lending in New Zealand.
Orr said that at a generic level, he favours simple regulation and needs to be convinced when banks want to use more complex tools such as the internal models.
In May, in the last Financial Stability Report, the Reserve Bank published the results of an exercise it conducted of getting the four major banks to estimate the risks of a hypothetical dairy loan portfolio using their internal models.
The results showed an enormous 40 percentage point difference between the highest and lowest ratings, and therefore a great gulf between the banks on how risky that portfolio was.
In July, Orr said the Reserve Bank has made an in-principle decision that the “big four” banks will have to report their capital positions using both their own internal models and the standardised the other banks are forced to use.
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