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Summary
- RBNZ announced that it could discuss next month reintroduction of loan to value ratio restrictions on the amount of high-risk lending banks can do in March 2021.
- The central bank also declared further delay in the introduction of new bank capital requirements till July 2022.
- RBNZ lifted LVR restrictions in May 2020 for at least 12 months after the Bank's Deputy Governor received more than 70 submissions on the recommended changes.
- Geoff Bascand stated that LVR consultations would occur as circumstances in the lending market had improved.
RBNZ made a surprising declaration today (i.e. 11 November) that by next month it would discuss on a probable reintroduction of loan to value ratio (LVR) lending restrictions on banks in March 2021 amid increasing worries of a housing bubble in NZ. The central bank acknowledged that it is observing swift growth in higher-risk investor lending.
The announcement from NZ's central bank came just hours ahead of RBNZ's monetary policy review today. The move has now also led to questions if RBNZ would stay on its commitment to keep OCR unchanged at 0.25% until at least March 2021.
The Bank also announced that it is further delaying the introduction of new bank capital requirements till July 2022, which were earlier postponed to 2021.
LVR restrictions were lifted in May
LVR's were first launched in 2013 to offer greater financial stability as banks were increasingly providing high LVR loans at that time.
On 1 May, RBNZ decided to ensure LVR restrictions did not have any adverse effect on borrowers or lenders as part of its mortgage deferral system introduced in reaction to the COVID-19 pandemic. RBNZ decided to lift LVR, as per its mandate for financial stability.
DO READ: RBNZ likely to encourage more lending through its FLP tool
The Bank reached its conclusion after evaluating a Regulatory Impact Assessment and obtaining substantial input from 70 submitters over the consultation period.
Submitters were quite worried about the detrimental effects on financial stability, such as the possibility of bank failure. They also noticed that the economy had deteriorated and job security had declined, and people's ability to pay a mortgage would undoubtedly diminish in the months ahead.
Risky decision to remove LVR
Dominick Stephens Chief Economist of Westpac stated that breaking the commitment to maintain LVRs off till 1 May raised questions about other obligations of the Bank like keeping an OCR of 0.25% till March. Hence, the odds of an OCR cut in February increases if circumstances improved.
Reserve Bank Deputy Governor and General Manager Financial Stability Geoff Bascand stated that the decision to remove LVRs in May was made to ensure credit flow and so that they did not have any impact on the mortgage deferral scheme implemented in response to coronavirus pandemic.
He noted that circumstances have changed in the banking industry since then and strong growth is being witnessed in higher-risk lending to borrowers. This increased the need for LVR consultations.
Further, RBNZ notified that limitations on dividend payouts would be preserved until 31 March 2021 or after that if needed. RBNZ is widely accepted to hold rates at 0.25% and the introduction of FLP tool to propel borrowing costs for lenders lower.
