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Bank risk real LVR target

Mitigation of bank risks, rather than dramatic house price correction, is the likely outcome of the Reserve Bank’s new LVRs, financial experts say.

Thursday, August 4th 2016, 12:26AM

by Miriam Bell

Last month the Reserve Bank announced it plans to introduce new LVRs which will require property investors around New Zealand to have a 40% deposit when borrowing for mortgages.

Many lenders – including Westpac, ASB and ANZ – implemented the proposed LVR changes immediately.

Following the Reserve Bank’s move, public attention has focused on the potential impact of the changes on the overheated housing market.

However, financial commentators don’t believe the new LVRs will lead to a significant fall in house prices.

Harbour Asset Management’s head of fixed interest and economics, Christian Hawkesby, said the Reserve Bank’s move might take the froth off overheating house prices

The proposed rule change will constrain investors’ access to finance and could, potentially, affect their enthusiasm if they anticipate constrained demand going forward, he said.

“But, at this stage, we do not foresee a dramatic correction in prices, although we do see the scope for falls as much more likely now.

“Low (and possibly lower) mortgage rates, ongoing positive net migration, housing supply shortage, and the unflappable Kiwi faith in housing argue against a sharp fall.”

While higher interest rates and higher unemployment would usually be the triggers for a market decline, in this situation it might come down to animal instincts and herd behaviour.

More tangibly, the Reserve Bank’s move signals a much more assertive approach to the risks they believe mortgage lending creates within the banking sector, Hawkesby said.

“Relative to when macro-prudential tools were first introduced in 2013, these new proposals are much more restrictive.

“In terms of financial stability, the new LVRs will mean the banking sector’s exposure to the riskiest part of the housing market will decline over time.”

It is the alleviation of the risks current levels of mortgage lending pose to the banks that is likely to be the biggest outcome of the Reserve Bank’s policy.

KPMG head of financial services John Kensington said banks have to be careful where their balance sheets are going and what they are being driven by.

Banks were getting concerned about deposits flowing away from savings accounts as term accounts mature, he said.

“Anecdotally as local deposits come due, they’re not being redeposited, some are being transferred into funds, but a lot of it is going into property.

"There’s a very real concern that the banking system cannot go on funding mortgages on one side of its book unless there are local deposits.”

Kensington said banks need to have a better balance between local deposits and overseas funding – otherwise they will be too vulnerable to global economic volatility.

In his view, the new LVR’s will be a bit of blunt tool when it comes to the housing market, although they might slow things down slightly.

“But they will help to mitigate the banks’ issues with deposits because people will have to leave their money there.

“They will also help to ensure banks’ earnings are sustainable, and help to reduce their exposure to volatility in the global and local financial markets.”

Tags: banks Lending mortgages risk

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Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
ANZ 5.19 4.05 3.95 4.49
ANZ Special - 3.55 3.45 3.99
ASB Bank 5.20 ▼3.89 ▲4.05 4.39
ASB Bank Special - ▼3.39 ▲3.55 3.89
BNZ - Classic - 3.55 3.45 3.99
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
China Construction Bank Special - 3.19 3.19 3.19
Lender Flt 1yr 2yr 3yr
Credit Union Auckland 5.95 - - -
Credit Union Baywide 6.15 4.95 4.95 -
Credit Union North 6.45 - - -
Credit Union South 6.45 - - -
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 4.80 4.95 -
HSBC Premier 5.24 3.35 3.35 3.35
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - - - -
ICBC 5.15 3.18 3.18 3.20
Kainga Ora 5.18 4.04 3.95 4.39
Kiwibank 5.80 4.14 4.30 4.64
Kiwibank - Capped - - - -
Kiwibank - Offset 5.15 - - -
Kiwibank Special - 3.39 3.55 3.89
Liberty 5.69 - - -
Napier Building Society - - - -
Nelson Building Society 5.70 4.25 4.15 -
Pepper Money Near Prime 5.64 - 5.44 5.44
Lender Flt 1yr 2yr 3yr
Pepper Money Prime 5.18 - 4.98 4.98
Pepper Money Specialist 7.59 - 7.39 7.39
Resimac 4.50 4.86 3.89 3.94
RESIMAC Special - - - -
SBS Bank 5.29 4.85 5.05 5.49
SBS Bank Special - 3.55 3.39 3.89
Sovereign 5.30 4.15 4.29 4.55
Sovereign Special - 3.65 3.75 4.05
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
TSB Bank 6.09 4.35 4.25 4.69
Lender Flt 1yr 2yr 3yr
TSB Special 5.29 3.55 3.45 3.89
Wairarapa Building Society 5.70 4.85 4.99 -
Westpac 5.34 4.15 4.09 4.49
Westpac - Offset 5.34 - - -
Westpac Special - 3.55 3.45 3.99
Median 5.34 4.02 4.09 4.39

Last updated: 22 November 2019 4:35pm

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