Restrictions on lending may have little impact

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LVR restrictions may not make much difference to the supply of credit, at least at first, one analyst says.

Friday, June 7th 2013, 10:09AM 1 Comment

by Susan Edmunds

The Reserve Bank has released another consultation paper on macroprudential tools, looking specifically at LVR restrictions.

Submissions close at the beginning of July. By the middle of next month, the bank expects to have defined what counts as LVR and ironed out other issues with the banking system.

JP Morgan’s Ben K Jarman says the documents outline several issues to be addressed with the sector as a whole – even down to devising definitions of when a lending event is deemed to have occurred.

He said, considering the work to be done, it would likely be some time before LVR restrictions were implemented.

But he said JP Morgan expected them before the end of the year if the housing market did not cool down. The RBNZ has indicated they will not apply to existing lending .

He said: “The stance has softened a little in recent months, with the discussion leaning more towards LVR speed limits, which limit the proportion of new lending that can land in a high LVR bracket, rather than outright caps.”

Exemptions will apply but only for fairly narrow situations, such as Government-backed affordable housing initiatives.

Jarman said LVR speed limits would concertina lending to just under or just above the threshold.

“That is because it is in the interest of any bank with a market volume share imperative to smooth their value of compliant high LVR lending across more loans. So we should see comparatively less ultra-high LVR lending and more high LVR lending. This would weed out the most dangerous practices but its impact on broader credit supply for high LVR lending could be quite gentle.”

Banks could also ease the impact by simultaneously writing more low-LVR lending, to ease the proportion in the high bracket.

Jarman said: “It seems unlikely that the RBNZ would start all guns blazing.”

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