RBNZ considers LVR restrictions

These tools include placing restrictions on loan-to-valuation ratios (LVRs) - for example, allowing bank to lend no more than, say, 80% of a property's valuation - forcing banks to hold set percentages of more expensive deposit funding or longer-term wholesale funding and altering the amount of capital banks are required to hold against loans on specific assets such as houses or farms.

LVR restrictions could act as a brake on credit growth during a boom and have the advantage of being imposed and enforced relatively swiftly, Reserve Bank governor Alan Bollard told a conference on banking regulation in Sydney last week.

A number of different tools might be used in tandem and their potency could be enhanced by a 'moral suasion' effect as well as their direct impacts, he said.

"The deployment of any tool would send an important signal to financial institutions, investors, rating agencies and the general public about the central bank's unease about rapid credit growth."

They could also mean short-term wholesale interest rates won't rise as much and therefore reduce the attractiveness of the New Zealand dollar to international investors seeking to take advantage of the relatively high interest rates New Zealand has had in the past.

That would be "of benefit to a small open economy such as ours in terms of reducing exchange rate volatility," Bollard said.

Still, "we must be careful about unintended consequences," as well as the costs of such measures, he said.

In particular, some measures have the potential to damage financial system efficiencies and might cause borrowers to seek other channels other than the banks in order to avoid such restrictions, he said.

Such policy tools aren't a panacea for macro-economic imbalances such as the tax distortions which contributed to the last housing market boom and which were addressed in the government's last Budget. Bollard said the central bank was "strongly supportive" of those tax changes.

Comments from our readers

On 30 March 2011 at 5:16 pm Simon said:

I take it that the Reserve Bank would target property investors and NOT first home buyers with it's suggested LVR restrictions? Most young couples buying their first home are lucky to have 10% of the purchase price saved let alone 5%! Whilst the Reserve Bank is thinking up new ways to influence the property market most of us already know that "home" ownership is a core pillar of our society that needs to be supported not discouraged!

On 31 March 2011 at 9:35 am Nigel said:

Forget the LVR the banks should stick to affordability. I had 40K saved when I bought my house for 400K. In the end I only put in 5% which left me with a 20K buffer in case of a rainy day. How can forcing me to put the whole 40K in be beneficial? If I have any employment/repair issues I am defaulting on my loan immediately.
What was more worrying was the fact that I had determined what I could afford to repay but the bank was happy to lend me well beyond that amount. Sensible lending to income ratios is the way to go.

On 31 March 2011 at 12:29 pm Darcy Ungaro said:

Buying a home with less than 20% deposit - it's an active space again, but is the 'first home buyers' revival at risk of being snuffed out already?

It's a smart move that the RBNZ is investigating other levers it can pull, but I agree with Simon, surely any restrictions should be applied only to property investors.

On 5 May 2011 at 9:11 pm Andrew said:

Actually Nigel, you would have needed 80K under the proposed changes!

On 24 July 2011 at 12:17 pm Yugraj said:

Placing restriction on LVR 80%, move investors to overseas where lending critieria is favourable to investor. Consequently that will discourage NZ Housing Investment.
LVR restriction also boost second mortgage market.

RBNZ considers LVR restrictions

The Reserve Bank is considering a number of different tools it might use to moderate credit booms and resulting housing or other asset bubbles but warns none are “a silver bullet.”

Wednesday, March 30th 2011, 7:14AM 5 Comments

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