by Miriam Bell
Evidence of the extent to which the housing market has slowed, particularly in Auckland, has been coming thick and fast of late.
This has prompted speculation from a range of sources, including the Prime Minister Bill English and Labour Party leader Jacinda Adern, that it might be time for the Reserve Bank to review its LVR rules.
However, in their weekly commentary, Westpac’s economists said today that this suggestion is premature.
They said that while the LVRs have done a lot to slow the pace of house sales, it was less clear that the restrictions are leading to dysfunction in the loan market.
“One symptom of this would be a rush of home buyers towards non-bank lenders; there has been some pickup in that segment of the market, but it remains a very small share of total lending.”
There might be a strong case for easing the LVRs if house prices were falling too rapidly, putting borrowers into negative equity and increasing the likelihood of loan defaults.
But, to date, the fall in house prices doesn’t meet that description and, going forward, Westpac expects prices to flatline, rather than spiral downward.
In addition, the risks for the financial system haven’t really dissipated despite the slowdown in the housing market, they said.
That’s because household debt is still at a high level relative to household incomes and house prices remain stretched relative to a range of fundamentals, like price-to-income ratios.
The economists said that when all of this is put together, the case for loosening the LVR limits is not compelling at this time.
“Especially with the financial stability risks stemming from the housing market still a dark cloud on the economic horizon.
“While lending restrictions will be eased at some point, their eventual roll back is likely to be gradual and is likely to be preceded by a period of consultation.”
Further, while lending restrictions are playing a role in the housing market slowdown, the more significant cooling factor has been the rise in borrowing rates over the past year, they added.
The view that the LVRs are here to stay – for the time being – seems to be the consensus view for economists.
ANZ economists said today that LVR restrictions will be removed in time, but it won’t be for a while and then it is likely to be in stages in the first instance.
Last week BNZ chief economist Tony Alexander said there was minimal chance of the Reserve Bank easing the LVRs in the near future.
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