RBNZ cracks down on mortgage lending
Kiwibank has been the first of the big retail banks to respond to new lending rules, promising to put first-home buyers first in the lending queue.
The Reserve Bank has finalised tougher-than-expected restrictions on low equity home loans which will come into force from October 1.
In a speech today, Governor Graeme Wheeler announced that banks will have to restrict new lending with loan-to-value ratios (LVRs) of more than 80 per cent to no more than 10 per cent of the dollar value of their new housing lending flows.
That will dramatically reduce the amount of high LVR loans the banks are writing, making it much harder to get a mortgage with a deposit of less than 20 per cent.
In theory, the new regime could strip about $2 billion out of the loan market in a year, equal to more than 4000 homes at average prices.
The announcement pushed the New Zealand dollar down against the greenback this afternoon. The kiwi dropped below the 80 US cent mark this afternoon, and recently traded at US79.90c.
Kiwibank chief executive Paul Brock said the bank would give priority to first-home buyers over those buying investment properties, in terms of lending on deposits of less than 20 per cent.
Kiwibank strongly believed that borrowers' ability to service debt was more important than the amount of equity, he said.
"Equity can be built over time and we do not want to push people out of purchasing a family home while they wait years and years to save a much bigger deposit," he said.
The RBNZ announcement is harsher than the 12 per cent "speed limit" that the banks were informally asked to prepare for in June.
Wheeler said the Reserve Bank was concerned about the rate at which house prices were increasing and the potential risks that posed to the financial system.
"The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy," he said.
The usual mechanism to help rein in housing demand would be to raise the Official Cash Rate (OCR), which would feed directly into higher mortgage rates.
But with inflation still below the 1-3 per cent target band, Wheeler said any OCR hikes would put pressure on the New Zealand dollar, potentially hurting exporters.
Wheeler said how long the LVR restrictions stayed in place would depend on how effective they were.
"LVR limits will be removed if there is evidence of a better balance in the housing market and we are confident that their removal would not lead to a resurgence of housing credit and demand," he said.
He conceded that it was critical to also address the shortage of housing and land supply, which was the main cause of increasing house prices in the hotspots of Auckland and Christchurch.
"But the LVR restrictions have a useful role to play alongside the supply measures."
Wheeler again warned that banks should not develop loan products specifically designed to avoid or undermine the new rules.
"The Reserve Bank expects bank senior management and bank boards to respect the spirit and intent of the LVR restrictions and to closely monitor the level of high LVR lending," he said.
Labour's housing spokesman, Phil Twyford, said first-home buyers were now "carrying the can" for the inflated housing market and speculators would benefit from the lending restrictions.
The Kiwisaver and Welcome Home Loan incentives would do little to help buyers in Auckland where the market was most heated, he said.
"John Key is out of touch if he thinks that $5000 extra through changes to Kiwisaver will make a difference to first home buyers. Adding 10 per cent to the deposit required for a mortgage adds up to $60,000 for an Auckland house. He's really out of touch if he thinks that's any kind of solution."
The Government needed a comprehensive policy to deal with first home buyers and the housing crisis.
"They should be clamping down on speculators, they should be building large numbers of affordable houses, they're doing neither of those things that's why they've got into this terrible mess."
Twyford said Key could not hide behind the fact that the limits were introduced by the Reserve Bank who had the mandate to do so, rather than by the Government.
It was only in May that Key negotiated an agreement with the Reserve Bank which gave it the power to impose these lending limits, he said.
"It was only an afterthought that he asked for some kind of exemption but by then the horse had bolted. This is a problem of John Key's making."
Green Party co-leader Metiria Turei said her party supported the restrictions.
"However, the [Reserve] Bank's attempt to control house price rises are being undermined by the National Government's inaction on a capital gains tax and its demand-side measures, both fueling the home affordability crisis.''
The expansion of the Welcome Home Loan scheme and the increased availability of Kiwisaver subsidies would only fuel price rises, undermining the Reserve Bank's moves while speculators would continue to squeeze out first-home buyers due to the lack of a capital gains tax.
A capital gains tax would remove tax-free gains for speculators and push them out of the market and lower house prices, she said.
WHY IS THIS HAPPENING?
The Reserve Bank is committed to maintaining financial stability in the banking system.
It is worried that as much as 30 per cent of the banks' new mortgage lending is in the riskier high-LVR brackets.
That's much higher than the historical average of about 20 per cent, and could leave homeowners in serious trouble if house prices fell suddenly.
"House prices are high by international standards when compared to household disposable income and rents," Wheeler said.
"Household debt, at 145 per cent of household income, is also high and, despite dipping during the recession, the percentage is rising again."
Limits on LVRs are one of four new macro-prudential tools signed off in a memorandum of understanding with the Government earlier this year.
WILL IT WORK?
Most commentators have suggested that the effect on the housing market will be minimal.
Rough calculations by HSBC suggest the changes could knock about 1 percentage point off annual house price inflation.
Borrowers and banks alike are widely expected to find ways to avoid the rules.
The Reserve Bank is aware that borrowers can ask friends or family members to lend them the missing equity, or go to non-bank lenders who operate outside its jurisdiction.
There have been some concerns that the changes will spark a return to the ''bad old days'' of second mortgages and cowboy lenders topping up deposits.
The central bank has asked banks to comply with the spirit as well as the letter of the law, and threatened to take action against those that test the boundaries.
WINNER AND LOSERS
The central bank has refused to make an exception for first-home buyers, despite pressure from the Government and outrage from both Labour and the Greens.
That means first-home buyers in expensive cities, especially Auckland, will be the worst off, requiring a much bigger deposit.
Highly geared investors will also lose out, as they tend to be a riskier bet than owner-occupiers.
The buyers with good credit records and strong incomes will have the best shot at accessing the limited amount of funding available.
While high LVR lending will become more expensive, those who have a built up a decent chunk of equity are likely to get significant price discounts.
That's because banks will compete even more fiercely for business in the lower, safer loan-to-value ratio (LVR) brackets.
The major banks have promised to toe the line, but are warning some prospective homebuyers will lose out.
The New Zealand Bankers' Association said people should be aware they might be declined loans.
"It's worth talking to your bank about your individual needs and circumstances," chief executive Kirk Hope said.
First-home buyers, small business owners and people seeking top-ups for renovations would all be affected, he said.
Hope said the association's member banks were committed to meeting their obligations and would comply with the new lending requirements.
"We have reassured government that as an industry we will respond constructively and responsibly to the new lending limits."
He said the ''real issue'' was a lack of housing supply in some parts of the country rather than the availability of cheap credit.
''While there are positive moves to deal with the supply issue, that will take some time to be resolved. Credit growth, currently at around five per cent, is not driving this.''
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