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Reserve Bank looks to new income-based home lending restrictions

Wednesday 11th May 2016

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New lending restrictions to prevent people borrowing too much relative to their income are on the cards, the Reserve Bank of New Zealand's two most senior officials say.

Governor Graeme Wheeler and deputy governor Grant Spencer made the comments at a media conference after the release of the bank's six-monthly financial stability report, which highlighted concern about the resumption of unsustainably high house price inflation nationwide, and especially in Auckland. The report stopped short of imposing new lending restrictions and the governors used a press conference to flesh out their thinking on possible additions to the country's growing array of macro-prudential controls.

They stressed there is no timetable for implementation of such a measure, which would require agreement from Finance Minister Bill English for inclusion in the government's memorandum of understanding with the central bank.

While loan-to-income ratios lending restrictions was one of "several things in the toolkit", it was not among the four macro-prudential options, included in the current MOU and "not in a state of readiness" for implementation.

Asked whether the bank was more likely to extend existing loan to valuation ratios (LVRs) than to pursue loan-to-income ratios (LIRs), Spencer said: "I wouldn't say that. No."

Wheeler said the bank was considering further macro-prudential measures to try to curb house price growth, but said: "we need to do more analysis and have discussions with the Finance Minister."

The bank has only been collecting LIR ratio information from the country's largest banks and only since mid-2015. Smaller banks are now likely to be included in ongoing monitoring, Spencer said. It was "definitely a relevant area" for further work.  Restrictions could be targeted just at Auckland or at the whole country, but the bank would prefer a "simple" approach.

"You would have to think about the impact on first-home buyers", especially in very expensive locations like Auckland, said Spencer. However, highly leveraged LIR lending was "considerably higher for investors" as a proportion of total home mortgage lending.

"It would probably impact investors more than first-home buyers. You could differentiate between investors and owner-occupiers. I'm not saying you would but saying what the possibilities are," said Spencer, who is head of financial stability at the RBNZ.

Wheeler suggested the government could address a range of tax concessions that favour property investors, such as "interest deductibility and offsetting losses against other income."

He also raised the importance of Auckland Council's mid-August decision on its Unitary Plan to help unblock one of many channels holding back the pace of house construction in Auckland, where affordable housing is in short supply and the city is one of the world's most expensive to buy on an LIR basis, at nine times average household income.

Asked about the longevity of LVR restrictions first introduced in October 2013 and described then as "temporary", Spencer said: "Housing cycles are very long. While these are temporary, there may be quite a long phase" between their introduction and removal.

The bank saw "no fruitful avenue" in seeking to restrict interest-only lending, he said.

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