In their latest Weekly Commentary, they say that deputy governor Grant Spencer’s speech last week indicated that the Bank had been surprised by the level of response to the rules.
“The RBNZ’s latest estimates put the impact of LVR restrictions as equivalent to a 25-50 basis point increase in the OCR, which is a touch stronger than the Bank’s initial assessment.”
The economists said a reason for that could be that banks had been even more conservative than they had to be under the rules.
They have to keep their low-deposit lending to less than 10% of their new loans, but the latest data showed that only 4.2% of new loans last month were to people with a deposit of less than 20%, after exemptions such as the Welcome Home Loans were applied.
The economists said: “While some degree of caution by banks is understandable (there could be harsh penalties if banks breach the rules) the extent of the pullback in low-equity lending might have been greater than the Bank anticipated. This has raised the possibility, in our minds, that if high-LVR spending remains low the RBNZ might consider relaxing the restrictions so the portion of low-LVR lending is closer to what was originally intended.”
Westpac’s economists said it was encouraging to hear the Reserve Bank talking about what would be needed for the rules to be lifted.
Spencer said last week that rising interest rates would give the Reserve Bank more scope to move on the rules, provided the Bank was comfortable that house price inflation would not take off again.
Westpac’s report said: “There are ominously few examples from overseas of similar restrictions ever being removed. If the RBNZ’s current rhetoric is to be believed, New Zealand could become the exception. We expect the housing market to slow substantially under the weight of rising interest rates, which will remain necessary because of the booming construction and primary export sectors. In such a scenario, the rationale for LVR restrictions might well disappear.”
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