WELLINGTON (Reuters) – New Zealand banks will be limited in how much they can lend on low-deposit, high-value mortgages, when new lending rules are imposed, the central bank said on Tuesday.
The Reserve Bank of New Zealand (RBNZ) said after consultation with the banks and public it would limit the amount of high loan-to-value ratio lending (LVR) that banks would be able to do.
“LVR restrictions on residential mortgage lending can help to dampen excessive house price growth in periods when credit growth is boosting housing demand beyond housing supply,” RBNZ deputy governor Grant Spencer said in a statement.
He said the approach was like setting a “speed limit”, and would still allow many high-LVR loans to be made.
As an example, the RBNZ said such a speed limit might see banks allowed to have no more than 15 percent of new lending on loans of more than 80 percent of a property’s value.
Industry commentators and the banks’ own industry group, the Bankers Association, have questioned whether restrictions will work, and suggested borrowers will seek alternate sources such as family, and non-bank lenders to get around any rules.
“We expect the introduction of a speed limit on high-LVR lending will only have a modest impact on house prices, and we will continue to see continued housing market pressures over the coming year,” said ASB Bank economist Christina Leung.
Spencer said initially banks would have to restrict their LVR loans to an average rate over a six-month period, which would make it easier for banks to meet the new limits, and cover the issue of pre-approved loans.
After that banks lending more than NZ$100 million ($80.38 million) a month would have to keep LVR lending to a three-month average, while banks lending less than NZ$100 million would stay with the six-month average.
Spencer said exemptions would be made for bridging, refinancing, and high LVR loans to borrowers moving home but not increasing their loan amounts.
The LVR limit is one of four macro-prudential tools the RBNZ has put in place to counter surging credit growth and house prices, which may pose a risk to the financial system and stoke inflation pressures.
The RBNZ says it will give two week’s notice before imposing any rules, and renewed its warning to banks to “follow the spirit, not just the letter of the restrictions”, and not engage in “innovative” policies to avoid them.
The central bank has voiced concern this year about house prices rising to record levels, particularly in the country’s biggest city, Auckland, and spilling over into broader inflation.
The RBNZ’s other macroprudential tools include increasing capital buffers, higher reserves, and sector capital levels.
It has said it does not want to raise its benchmark cash rate, currently at a record low 2.5 percent, to tackle the housing market because it might fuel an already elevated New Zealand dollar. ($1 = 1.2441 New Zealand dollars)
(Reporting by Gyles Beckford- Editing by Kim Coghill)
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