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On 8 December, RBNZ announced to look for views on its plan to reinstate loan to value restrictions (LVR) on mortgage lending from March 2021.
When Covid-19 struck, the LVRs were halted in April as part of a range of measures to boost the economy and households. They had to be in place for at least a year, but their omission was partially attributed to rising house prices, fuelling the challenge of first-time homebuyers being able to afford property.
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No LVR restrictions, frequent shortages and historic low-interest rates had given a push to house prices with the prices surging about 70% over the past decade in NZ.
Geoff Bascand Deputy Governor of RBNZ stated that the amount of riskier lending has been witnessing rapid growth, particularly for investors and conditions have been getting better in the lending market.
RBNZ was concerned that an increase in high leveraged borrowing against an uncertain economic backdrop due to COVID-19 could result in rising risks to financial stability.
ALSO READ: NZ government approaches RBNZ to deal with skyrocketing housing prices
Under LVR constraints, banks can make only up to 20% of their residential mortgage loans to owner-occupiers with deposits of less than 20%. There should be no more than 5% of those loans to borrowers with deposits of less than 30%.
Reimposing LVRs could reduce house prices
RBNZ expects that reintroduction of LVRs next year could cut off about 1-2 percentage points from the house price inflation, relative to the price that housing would be if controls were not reinstated.
ALSO READ: New Zealand Housing Prices continues to Soar
The LVR restrictions should merely ensure that there is no rise in more speculative lending to owner-occupiers while holding high-LVR lending to borrowers on its previous downward course, RBNZ stated.
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However, provided that "irrational exuberance" could affect housing markets, LVR constraints could help to protect against a potential further spike in house price inflation.
Wider economic impact of restoring LVRs
In terms of broader economic impact, RBNZ stated that LVRs could affect the economy through their impact on house prices and housing wealth, which in turn affects both consumption and residential investment.
DO READ: Adrian Orr to discuss tax alterations with government in housing clash
Research conducted by the bank has found out that on average, the marginal propensity to consume out of housing wealth amounts to 3 cents of additional consumption spending for each dollar's increase in housing wealth.
In the short term, there could be a slight negative impact on consumption, but this can be offset by a decreased probability of a potential economic slowdown driven by housing market correction.
However, reinstating LVRs could give incentive to banks for high-LVR mortgage lending to shift into the non-bank sector, which is not subject to the restrictions. It can also reduce the scope for first-home buyers with low deposits to enter the market and could also put pressure on rents.
Hence, the overall economic impact of restoring LVR restrictions is uncertain.
