Study finds results for LVR mixed

RICHARD MEADOWS
Last updated 05:00 29/08/2013

Relevant offers

Money

Outrageous costs and mis-sold loan insurance to be weeded out by new code Kids will still be bombarded by junk food adverts under new rules Financial benefits of escaping the rat run and working from home New Zealanders in Australia say Kiwis pay too much for food The cash machine has been around for 50 years Complaint upheld against Lotto Mother's Day ad Sheldon Slabbert: Brexit, one year on Food giants resist Aussie call to ban cartoon characters from junk-food ads Paymark and iTicket partner to offer online eftpos payment First-home buyers' guide to getting a mortgage

New rules on low-equity mortgages could become stricter yet, with international evidence showing the effect on house prices tends to be "modest and short-lived".

The Reserve Bank last week announced its restrictions on high loan-to-value ratio (LVR) lending would come into force from October 1.

The central bank is concerned about the rapid rise of house prices, and the potential risks that poses to the economy.

Westpac senior economist Michael Gordon reviewed four case studies of countries where LVR limits have been introduced and found mixed results.

Westpac chose four countries with similar market conditions to New Zealand to study.

South Korea: Deregulation in the financial sector led to "explosive" growth in household credit in the late 1990s and early 2000s. The Bank of Korea started introducing LVR limits in 2002, later combining them with caps on debt servicing to income ratios.

The restrictions were tightened 12 times and loosened 5 times between 2002 and 2010, though not always at the national level.

Studies found the tightening measures helped slow the rate of house-price inflation and household debt over a three to six-month period.

Canada: Canadian lenders have to buy mortgage insurance cover for high-LVR loans, mainly through a government-backed agency. After a housing boom in the early 2000s, the agency's underwriting standards were tightened to lower the maximum LVR from 100 per cent to 95 per cent.

There were three further rounds of tightening up till 2012, which capped refinancing at 80 per cent of the home's value. The ratio of household debt to disposable income continued to rise from 150 per cent in 2008 to 165 per cent today.

Israel: After the global financial crisis (GFC), house prices grew rapidly as borrowers took advantage of floating interest rates as low as 1.75 per cent.

In May 2011, the floating-rate part of the loan was restricted to one-third of the total. That was followed by strict LVR caps in late 2012 of 50 per cent for investors and 75 per cent for first-home buyers.

Sweden: Swedish house prices averaged about 10 per cent growth each year between 2001 and 2007, slowing during the GFC before rebounding again.

In 2010 the banking regulator introduced an 85 per cent LVR cap on new home loans.

"The most visible response was an explosion in unsecured top-up loans, albeit at higher interest rates than for secured loans."

Ad Feedback

- BusinessDay.co.nz

Special offers

Featured Promotions

Sponsored Content