Return to riskier mortgage lending a dangerous game

While banks tightened their lending standards for residential borrowers during the financial crisis, there have been signs of an easing in recent months, with some banks prepared to offer housing loans at relatively high loan-to-value ratios, the Reserve Bank's six-monthly stability report says.

The bank is worried the increased risk to both banks and borrowers with higher LVRs will dampen the growth seen in both the housing market and economy as a whole.

House prices are historically still extremely high, pushed up over recent months as a result of a shortage of listings and increased demand.

"The housing market is currently strengthening, but we believe house price growth will slow after the current recovery phase," the bank said. "Continued weakness in the labour market, along with falling agricultural incomes, could also weigh on the housing market.

"We would encourage the banks to avoid any return to riskier mortgage lending practices."

Also contributing to the warnings are rising mortgage rates. Currently, historically low floating rates are extremely attractive, but are set to rise in the near future as the economy recovers further and there are concerns some borrowers will be caught out by the increase in repayments.

"Overall, the housing market recovery is likely to be limited, and subject to downside risks as interest rates start to rise from very low levels," the report said.

The report also reinforces how vulnerable the New Zealand economy, banks and households are to stress emanating from global financial markets.

"The New Zealand economy needs to live more within its means to reduce its vulnerability to adverse developments in offshore markets," Bollard says.

"The lesson here is that a more cautious approach to credit expansion is warranted during the next economic upswing."

However, there is an extremely fine balancing act for the banks to walk, as continuing economic growth depends on their willingness to lend to new borrowers, both for private loans and businesses.

Comments from our readers

On 11 November 2009 at 9:50 pm phil said:

True, if the banks or any big companies go pear shaped in the near future, our government sure won't have the money to bail them out.
Considering they are currently going further in debt by a billion a month.

They better make sure these banks don't go pumping things up for a bigger crash than before.

On 12 November 2009 at 9:34 am Andy P said:

For once, I agree with Bollard... sort of. However, the fact remains; People still need somewhere to live, and there are only 3 housing options - buy privately, rent, or state housing. Clearly the government (past and present) has moved away from state housing, preferring instead to rely on the private investors to provide the capital. With banks now requiring a 20% deposit (nothing new there) BUT not allowing any second mortgage funding, first home buyers will find the goal posts have moved beyond reach. In years gone by there were Housing Corp advances and Building Society loans to help first-home buyers. Bollard needs to understand that property investors (landlord) provide a very valuable service to society. They provide accommodation to those who cannot or will not buy property. If there is no property investment, people will go without housing, or the accommodation will be sub-standard. Ask anyone in the building industry - a large portion of the economy revolves around housing, from the foundations to the interior decoration, and EVERY industry in between. If Bollard stops the housing, he will again stop the economy. Mortgage lending can still be very safe with higher LVR's. The banks just need to be more careful with brokers and income and debt servicing.

On 12 November 2009 at 3:21 pm Simon said:

What people fail to realise is that the house price is only determined by the amount people can borrow. If people can borrow more, house prices go up. If people can borrow less, house prices go down. If you want houses to be more affordable, then stop allowing people to borrow so much. For proof just try and find someone who has brought a house without debt. If everyone uses debt to by property, then controlling the debt, limits the funds of everyone buying property. If no one has enough debt to buy property at the current prices, then the market can only go down.

Return to riskier mortgage lending a dangerous game

Easing lending criteria and higher loan-to-value ratios could potentially see the country return to a debt-fuelled housing cycle and dampen the recovery seen thus far, warns Reserve Bank Governor Alan Bollard.

Wednesday, November 11th 2009, 11:32AM 3 Comments

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