Housing market weakening, but lifting of LVRs unlikely until at least mid-2018

A slowdown in the housing market has prompted calls for lending restrictions imposed on banks to be lifted, but ...
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A slowdown in the housing market has prompted calls for lending restrictions imposed on banks to be lifted, but economists do not expect changes to be made until at least mid-2018.

New Zealand's housing market is slowing, but calls for a swift lifting of lending restrictions seem likely to go unheeded.

A sharp drop in sales and early signs of falling prices have prompted some in the real estate sector to claim it is time for loan to value ratio (LVR) lending restrictions, which constrain the amount of lending banks can make to those with small deposits, to be lifted.

National leader Bill English called for the Reserve Bank to outline when the rules could be relaxed, although the central bank has not made its plans clear.

The entrance to the Reserve Bank in Wellington.
MAARTEN HOLL/STUFF

The entrance to the Reserve Bank in Wellington.

Westpac chief economist Dominick Stephens said the housing market had slowed markedly, much more quickly than the Reserve Bank had anticipated, and was likely to be "pretty subdued" for much of the next 12 months.

READ MORE: Bill English sends signal to central bank to plan end to loan-to-value limits

While part of the slowdown was related to the election, Stephens said the market began slowing in late 2016, driven by higher interest rates and "a little more difficulty accessing credit".

But Stephens said the restrictions, designed to reduce the threat to banking system from risky lending, were unlikely to be relaxed in the short term as the risks the housing market posed to the banking system was not affected by a slowing market.

"The degree of risk in the system is not changing at a rapid rate," Stephens said.

"It's far too simplistic to say there's a drop in turnover in the housing market and house prices have flattened or fallen a wee bit and so therefore we need to wholesale remove the LVR restrictions. That's totally off base."

Stephens was confident the LVRs would remain in place in the current form for at least the next nine months.

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Infometrics economist Mieke Welvaert said the Reserve Bank appeared to be "nowhere near" the removal of LVRs.

If the central bank was minded to consider the LVRs it would signal a plan to do so in one of its six-monthly financial stability reports, the next of which is due in November, before entering a period of consultation.

The bank would likely "look through" short term changes in the housing market, Welvaert said. Even if LVRs were removed, it did not necessarily mean lending would become easier, with the Australian banks taking action after ratings agencies Moody's and Standard & Poors downgraded the sector because of concerns of real estate exposure.

"Theoretically, the Reserve Bank could roll back LVRs, but the banks might not revert back to previous lending rates."

While the official cash rate is at an all time low of 1.75 per cent, Reserve Bank statistics show the cost of mortgages has been rising, as banks face higher funding costs.

The average rates offered by banks to new customers for both floating rate and two-year fixed mortgages have climbed 0.3 percentage points from the lows of mid-2016. 

Cameron Bagrie, chief economist at ANZ said a case could be made for removing LVR restrictions "soon" as Auckland prices were dropping, household credit growth had slowed and the "case for implementing them in the first place was hardly overwhelming".

But Bagrie said the Reserve Bank was still concerned about the risk of the market taking off again, with migration still near record levels and interest rates near historic lows.

"I do believe that we are closer to the day when these restrictions are relaxed, but the earliest that would be is mid-2018 after the Reserve Bank delivers the May financial stability report."

Even then there was likely to be only a "marginal" relaxing of the rules for owner-occupiers, Bagrie said, allowing banks to lend to " a few more" borrowers with a deposit of less than 20 per cent.

 

 

 - Stuff

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