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Category: Business, Economics and Finance / Economic Trends / Money and Monetary Policy / Housing Industry / Housing

NZ considers more home loan limits to head-off 'sharp correction'

Tuesday, 19 Jul 2016 10:35:11 | Thuy Ong

The RBNZ warns a housing crash would undermine financial stability. (Jeremy Bank: www.sxc.hu)

The Reserve Bank of New Zealand has released a consultation paper that proposes new restrictions on home loans that will bring the rest of the country in line with those currently in place in Auckland.

Under the proposed changes, no more than 5 per cent of bank lending to residential property investors across New Zealand would be permitted with a loan-to-value ratio of greater than 60 per cent, or a deposit of less than 40 per cent.

The loan-to-value ratio (LVR) is a measure of how much a bank lends against mortgaged property, compared to the value of that property.

For example, the RBNZ stated that borrowers with less than 20 per cent deposit (more than 80 per cent LVR) are often stretching their financial resources.

For owner-occupiers, the proposed changes would mean no more than 10 per cent of lending would be permitted with an LVR of greater than 80 per cent, or a deposit of less than 20 per cent.

The Reserve Bank considers a sharp correction in house prices to be a key risk to the financial system, and one that is increasing the longer the current boom in house prices persists.

"A severe downturn in house prices could have major implications for the banking system, with more than 55 per cent of bank assets secured by residential property."

Restrictions would begin from September

The proposed new restrictions would take effect from September and remove the current lending distinction between Auckland and the rest of the country.

Loans to construct new dwellings however, would continue to be exempt.

"Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength, the proposed restrictions recognise the higher risks associated with such lending," said RBNZ governor Graeme Wheeler in a statement.

"A sharp correction in house prices is a key risk to the financial system," he said, adding that a sharp correction would cause long-lasting damage to households and the broader economy.

Earlier this month, the RBNZ threatened more measures to cool the nation's runaway housing market.

In November 2015, the RBNZ tightened its loan-to-value ratio restriction to 70 per cent for people borrowing money to buy investment properties in Auckland in response to a renewed home price surge in that city.

The Reserve Bank of New Zealand introduced loan limits in October 2013, more than a year before Australia's bank regulator APRA introduced softer and less formal mortgage restrictions.

AustraliaPlus


 

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