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Rising home loan rates a fait accompli

BNZ economist Craig Ebet provides a clear analysis of the Reserve Bank's Financial Stability report and what it means for home loan rates and LVR restrictions.

Thursday, May 15th 2014, 3:02PM

by Craig Ebert

Of all the issues and risks the Reserve Bank dutifully discussed in its Financial Stability Report (FSR) it was the local housing market, and China, that seemed to bubble to the surface.

But before delving into this, one shouldn’t overlook the Reserve Bank’s opening remark that “The New Zealand financial system remains sound, and well placed to support expansion in the economy.”

Indeed, that “By a range of measures, the financial system is now stronger than at any time during the last major economic and credit cycle of 1999-2007.” The buffers not only remain but have improved, FSR by FSR, over recent years.

Still, the Reserve Bank is keeping a close eye on a number of risks (as it should). Chief amongst these would appear to be the local housing market and the debt that is sheeted against it. Rightly or wrongly, discussion on this – both within the FSR and during the press conference that came with it – gravitated (degenerated?) to the loan-to-value ratio (LVR) restrictions.

The RBNZ officials reiterated that these would not be removed until there were signs of better balance in the market.

For the meantime: “Current prudential policies remain appropriate.”

And with the Deputy Governor, Grant Spencer, suggesting the Bank was looking to judge the impacts of the LVR policy over, initially, a 12 month period, the inference was again that any change would have to wait until the end of 2014, at the earliest.

There was the admission that the ratio could be relaxed from its present 10% as an interim measure, before being removed altogether. But there remain many strong demand and supply forces for the Bank to assess before being able to remove the LVR restriction without compunction.

In this vein, note the Reserve Bank mentioned it will very soon publish an analytical paper on the finer points of the LVR impacts on the housing market and financial system.

The Bank has already suggested a -2.5% impact on house price inflation (perhaps a bigger quantum, if the QVNZ data are, indeed, as superior to the REINZ data in indicating trends as the RBNZ seems to think).

In some respects, the hurdle to remove the LVR policy would not seem too great, in that the Bank implied “better balance” in the market to simply mean house price inflation slowing to be more in line with income growth. That this infers sustained highs in the value-to-income ratios that the Bank frets about seemed to be overlooked.

However, the RBNZ officials will feel nervous about removing – even altering – the LVR restriction when net immigration is becoming as strong as it is.

In this regard, Wheeler admitted at the FSR press conference that the Bank’s recent Monetary Policy Statement was probably under-estimating the extent of this year’s immigration boom. This was something Grant Spencer highlighted as a macroeconomic pressure in his speech.

Whatever the Bank’s leanings on the housing market outlook, it didn’t stop it talking about the increasing path for interest rates, in a fait accompli kind of way.

In contrast, very little, if anything, was mentioned about the “overvalued” currency. Whether this sounds like a central bank thinking of taking a pause in its programme of removing OCR stimulus we’ll leave to readers to judge.

We still think the currency can’t be ignored in the OCR debate, in the least because the Reserve Bank still thinks it important. Wheeler’s subsequent mention of the “carry trade” at this afternoon’s testimony to Parliament’s Finance and Expenditure Committee would seem to betray this latent concern.

If housing was the local risk that the RBNZ drew most attention to in today’s FSR, it was China when it came to the global scene. Yes, the Bank also wondered about the impact of the Federal Reserve’s policy stimulus removal (particularly via the bond market) and the underlying health of the European banking system. But it was China where the word-count was highest and a Box assigned in the FSR document. This is even more reason to keep an eye on what’s going on there. The RBNZ (and RBA) will arguably have some good insight into this otherwise relatively opaque economic and financial system.

As for the local “stress tests” the Reserve Bank talked about this morning, we wouldn’t read too much into this. Far from indicating any increased discomfort in the financial system, these tests seem more aimed at making more formal, and general, a process that the main registered banks already adhere to in a bottom-up way. 

Nor would we make too much of the changes the Bank proposed with regard to financial system regulation. This was described as more of a "tidy up" of the framework that has expanded and changed quite a bit over recent years – with the aim of making it more efficient – rather than anything of substance.

Overall, then, the Financial Stability Report, and its associated audio by RBNZ staff, told of a relatively robust financial system, albeit one with ongoing risks, particularly around the local housing market, and China in terms of matters global.


Craig Ebert is an economist at the BNZ.

« No handout for first-time buyersRBNZ: What might have happened without LVRs »

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Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
ANZ 5.19 3.95 4.15 4.49
ANZ Special - 3.45 3.65 3.99
ASB Bank 5.20 3.89 4.05 4.39
ASB Bank Special - 3.39 3.55 3.89
Bluestone 4.44 4.44 4.29 4.34
BNZ - Classic - 3.49 3.55 3.89
BNZ - Mortgage One 5.90 - - -
BNZ - Rapid Repay 5.35 - - -
BNZ - Std, FlyBuys 5.30 4.45 4.35 4.55
BNZ - TotalMoney 5.30 - - -
China Construction Bank 5.50 4.70 4.80 4.95
Lender Flt 1yr 2yr 3yr
China Construction Bank Special - 3.19 3.19 3.19
Credit Union Auckland 5.95 - - -
Credit Union Baywide 5.65 4.75 4.75 -
Credit Union North 6.45 - - -
Credit Union South 5.65 4.75 4.75 -
Finance Direct - - - -
First Credit Union 5.85 3.99 4.49 -
Heartland 6.70 7.00 7.25 7.85
Heartland Bank - Online - - - -
Heretaunga Building Society 5.75 4.65 4.80 -
HSBC Premier 5.24 3.54 3.20 3.69
Lender Flt 1yr 2yr 3yr
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 5.15 3.18 3.18 3.20
Kainga Ora 5.18 3.97 4.05 4.39
Kiwibank 5.15 4.20 4.30 4.64
Kiwibank - Capped - - - -
Kiwibank - Offset 5.15 - - -
Kiwibank Special - 3.45 3.55 3.89
Liberty 5.69 - - -
Napier Building Society - - - -
Nelson Building Society 5.70 4.25 4.15 -
Lender Flt 1yr 2yr 3yr
Pepper Money Near Prime 5.64 - 5.44 5.44
Pepper Money Prime 5.18 - 4.98 4.98
Pepper Money Specialist 7.59 - 7.39 7.39
Resimac 4.50 4.45 3.89 3.94
RESIMAC Special - - - -
SBS Bank 5.29 4.85 5.05 5.49
SBS Bank Special - 3.39 3.55 3.89
Sovereign 5.30 3.89 4.05 4.39
Sovereign Special - 3.39 3.55 3.89
The Co-operative Bank - Owner Occ 5.15 3.49 3.59 3.89
The Co-operative Bank - Standard 5.15 3.99 4.09 4.39
Lender Flt 1yr 2yr 3yr
TSB Bank 6.09 4.19 4.35 4.69
TSB Special 5.29 3.39 3.55 3.89
Wairarapa Building Society 5.50 3.95 4.05 -
Westpac 5.34 4.15 4.09 4.49
Westpac - Offset 5.34 - - -
Westpac Special - 3.39 3.55 3.99
Median 5.34 3.96 4.09 4.39

Last updated: 21 February 2020 4:32pm

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