Reserve Bank to ease loan-to-value ratio restrictions

Risks to New Zealand’s financial system have eased over the past six months, but vulnerabilities persist. In particular, households remain exposed to financial shocks due to their large mortgage debt burden.

However, both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending. In response, we are easing our loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained we expect to further ease LVR restrictions over the next few years.

• The RBNZ relaxed both owner-occupier and investor loan-to-value ratio restrictions (LVRs), in effect from 1 January 2019.
• Owner-occupier restriction shifts to 20% (from 15%) of such loans can be for 80+% LVR.
• Investor restriction sees LVR limit up from 65% to 70%, with the same 5% ‘speed limit’ on higher LVR loans.
• The magnitude of both these easings is the same as for when the restrictions were eased a year earlier.

While domestic risks have eased, global financial vulnerability has risen. Significant build-ups in debt and asset prices, and ongoing geopolitical tensions, overhang financial markets. This vulnerability is highlighted by the current elevated price volatility in equity and debt markets. New Zealand’s exposure to these global risks has reduced somewhat, as New Zealand banks have become less reliant on short-term, and foreign, funding.