The Reserve Bank yesterday released its response to submissions on high-LVR restrictions and confirmed when it introduced restrictions, it would do so as a proportion of the new high-LVR lending a bank did, rather than  restricting low-deposit loans altogether. 

No official decision has been made on when to deploy the tool but it seems they are not far off. 

Deputy governor Grant Spencer said: “This ‘speed limit’ approach would enable many high-LVR borrowers to continue to obtain mortgages.”

He said restrictions would dampen excessive house price growth in periods when credit growth was boosting housing demand beyond supply. “In so doing, they can reduce the risk of a rapid correction in house prices and the economic and financial instability that would ensue.”

Banks would be allowed to exempt a limited number of categories of high-LVR loans, when calculating their compliance with a specific speed limit. Those loans would include Housing New Zealand mortgage-insured loans, bridging loans, refinancing loans and high-LVR loans to borrowers who are moving home but not increasing their loan amount.

NZIER economist Shamubeel Eaqub said the message the bank was trying to send was exactly counter to what the Government was doing by making it easier for some borrowers to access Welcome Home Loans and the KiwiSaver first-home subsidy.

The Government announced at the weekend that it would increase the income threshold for couples to qualify for both schemes to a combined $120,000, although the threshold for a single person has been cut slightly to $80,000.  It is expected to mean just over 25,000 more people get some Government assistance to buy their first homes, over the next four years.

Eaqub said while the number of people affected might be small in real terms, the Government’s move sent a message that was contrary to what the Reserve Bank was trying to achieve.

Spencer made it clear that banks would be expected to follow the spirit, not just the letter of the LVR limits.

Eaqub said that clearly showed that the bank wanted to limit the amount of high LVR lending that went to those who could least afford it.  But the Government’s move was trying to drive lending to those lower-income households.

“It’s about the directive the Government is sending, that it wants to support people to buy homes when prices are already high and rising.”

People who needed that Government help would be the most hurt in the case of a price correction, Eaqub said. 

Because banks often  issue pre-approvals that are valid for six months, so the Reserve Bank would initially require banks to meet a speed limit measured as an average rate over a six-month period. “Thereafter, the speed limit for banks with lending in excess of $100 million per month would apply to the average rate over three-month windows, as originally proposed. However, we would expect the banks to modify their approach to issuing pre-approvals, in order to ensure that they fall within any speed limit on an ongoing basis.”

Those lending under $100 million would continue to be assessed on six-month windows.

Banks would get two weeks’ notice of limits.