When there’s a crisis, the Reserve Bank of New Zealand has two main jobs – to shore up confidence and make sure cash still flows around the economy.
From May 1, the Reserve Bank has removed mortgage loan-to-value ratio (LVR) restrictions for 12 months to support financial stability by removing one potential obstacle to the flow of credit in the economy, helping to soften the downturn.
Local banks said this will allow them to support customers through the impact of COVID-19.
Deputy Governor and General Manager of Financial Stability Geoff Bascand says that it is unlikely that banks will weaken lending standards to high risk borrowers.
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“The more likely risk is that banks are overly cautious with lending to credit-worthy borrowers,” Bascand says.
The Bank adds that by improving the equity positions of mortgage borrowers since it introduced LVR restrictions 2013, it is likely that a significantly smaller number of borrowers will have to sell their house or default on their mortgage as a result of the current economic shock.
They have been the subject of fierce debate ever since. In their current form, banks could lend only 20 percent of their residential mortgage book to owner-occupiers who didn't have at least a 20 percent deposit and 5 percent to investors who didn't have a 30 per cent deposit.
Nick Goodall, head of research at data analysts CoreLogic, says: “The introduction of the limits are part of the reason our market is in the strong position we find it in today, and one that should help reduce the fall in property values over the next year.
“When LVR was introduced in October 2013, the Reserve Bank set out to shore up the financial stability of the country. The GFC was still fresh in our minds - there’d been growth in the housing market and exceptional credit growth.
“The economy and property market were too exposed.”
Goodall says that the policy was designed to manage housing market downturns and prevent dramatic price drops like the one Sydney suffered at the start of 2019.
“It didn’t happen here because the Reserve Bank had the foresight to force more prudent lending. Instead of a downturn, we had a bit of a stall.”
James Wilson, head of valuation at OneRoof’s data partner Valocity, agrees, saying the Reserve had seen what had happened in the US during the GFC, and decided to ensure New Zealand’s banks had adequate capital to ride through market fluctuations.
“They also needed to keep inflation within acceptable parameters - not just house prices, all inflation,” Wilson says.
“It needed to be at a more sustainable rate, and not crash the market. Who knows how much more rapidly house prices would have grown [if the LVR had not been introduced].”
Goodall says that whatever the Reserve Bank announces this week, individual banks will still have their own measures for prudent lending.
“They don’t want too many low deposit loans - they’ll still look at serviceability. Borrowers will still have to satisfy them that they can still make payments,” he says.
Goodall rebuffs arguments that the LVR has stunted first home buyer activity in New Zealand. He says that while there was a temporary drop in first home buyer activity after the LVR was introduced, it has gradually recovered over subsequent years. At the start of 2020, first home buyers in Auckland accounted for 26 percent of all property sales in the market – more than the average 24 percent seen in the three years leading up to the LVR.
Goodall says that first home buyers have been helped by the curbs on price inflation and demand, as well as other government levers, such as the First Home Loan that requires only a 5 percent deposit.
“This is actually beneficial for first home buyers trying to get into the market,” he says.
Rupert Gough, founder of mortgage brokers The Mortgage Lab, says the planned suspension of the LVR restrictions will mean “if you are a good client, then the bank can now lend to you. But they’ll still be responsible in their lending.”
He expects the most important change that will take place as a result of the Reserve’s move is the return of pre-approvals.
“It’s been an issue for a couple of years. [Pre-approval] means people can turn up and make an offer with confidence. If pre-approvals came back on the scene, the first home buyer journey will be a lot less stressful,” he says.
Gough says banks will be asking more questions around employment, and the usual employer letter confirming income may also need to include assurances about job security. Registered valuations will also still be needed for low deposit loans.
“Giving the bank some surety around this will be the key to a successful mortgage application in 2020,” he says.
Gough also points out that deposits of less than 20 percent also incur additional fees or interest rates of between 0.25 and 0.75 percent, so a 3.8 percent rate, for example, would end up being 4.05 percent to 4.55 percent.
Goodall and Wilson don’t expect there will be a surge in low deposit lending once the LVR restrictions are dropped.
“Banks, even now, could issue lower deposit loans, if you met certain lending criteria,” says Wilson.
“And if they lower their deposit requirements, they’ll still be focused on the valuation side. With uncertain property values, they’ll be more conservative, not less.”
Updated 6pm, April 30 with the Reserve Bank announcement of the removal of LVR restrictions from May 1.
