ANZ is taking a different view to other commentators and argues that the Reserve Bank's decision to introduce speed bumps, that is lending restrictions on low equity loans, will have an impact on the housing market. The bank states its case here.
Tuesday, August 27th 2013, 9:23AM
While some have deemed the October introduction of high-LVR speed limits on mortgage lending as likely to have a minimal impact, we do not.
Putting on our “independent” commentator hat, there are five main aspects that we think are being underestimated:
The "price" being charged in the high LVR space will move up too. Back in March the RBNZ flagged an increase in regulatory capital required for high-LVR housing lending, with this set to kick in on September 30. This will result in an increase of regulatory capital for housing loans of around 12 percent. That's a cost to banks, which will need to pass it on. One outcome of such changes will likely be the more rigorous application of low equity premiums and low equity margins. These equate to an interest rate increase for riskier lending. And we suspect gone are the days when banks will offer up huge cash incentives or gimmicks, such as the latest tech gadget with each mortgage.
Banks have a huge volume of preapprovals to now manage. A preapproved loan is a legal contract that can be alive for 6 months. Looking at weekly mortgage approvals data over the preceding months suggests this "pipeline" could be substantial. That's an asset (new business) but it’s now also a liability: there will be some uncertainty as to how these preapprovals will roll off, and banks will need to manage this uncertainty. We wouldn’t be surprised to see tweaks to lending criteria. Those pre-approved high-LVR loans that "confirm" will likely end up facing the differentiated pricing discussed above too.
The plumage of the Governor: he's not a hawk or a dove. He's the one with the shotgun who likes to get things done. If LVR restrictions don't work he'll: a) tighten them further or b) use another prudential measure or c) raise the OCR harder and faster. The latter may not be his preferred strategy but it is most certainly still in the toolkit.
Banks had already started to tighten lending criteria and back off in the high LVR space before the final announcement. That's the credit channel of monetary policy at work: it's hugely relevant for the traditional monetary policy transmission mechanism.
The Governor was pretty pointed in terms of comments that he expects bank executives and board members to operate within the spirit of the new regime. Those are not the nuances of a regulator who wants to be mucked around.This does not mean LVR restrictions and other changes are a silver bullet to housing shortages. They will certainly not cause 30,000 new Auckland houses to pop out of the ground.
They are tools that merely buy the RBNZ time before the supply-side response starts to kick in.
The measures will also be subject the law of unintended consequences.
Disintermediation towards more lightly regulated lenders is one risk. Also,a side effect of risk based pricing could be lower mortgage interest rates than otherwise for low-LVR lending as banks chase borrowers with high equity.
However, given the drift higher in fixed mortgage interest rates (courtesy largely of US monetary policy) overall interest rates seem likely to continue to increase for all borrowers, just at different speeds.
We will be watching the deposit space closely: it’s one bellwether of future mortgage interest rate moves.
Even with these caveats, it’s hard to go past the spirit of last week’s messages.
Giving the measures more punch is the fact that they are being accompanied by a tightening in financial conditions (i.e. witness the rise in fixed borrowing rates).
More restrictions on the credit channel of monetary policy – plus long rates rising courtesy of the US Federal Reserve – mean less pressure on the traditional NZ monetary policy (OCR) mechanism.
This is a key reason we’re not expecting the RBNZ to be heavy-handed with the OCR until 2015 (not to be confused with saying that the OCR will not rise sooner: it will!).
Moreover the RBNZ is likely quite chuffed with the lift in long-term fixed rates in the housing arena: it’ll keep borrowers chasing the front (cheapest) part of the curve.
This is where the “specials” remain. The RBNZ will thereby get more bang for its buck when it finally decides the time is ripe for an OCR hike, which means they can afford to be patient.
