The first three days of this week have been very busy for Reserve Bank of New Zealand. The key message from all their activity is that residential property lending is well-controlled, hence their comfort in loosening the LVR restrictions.
On Monday, the Reserve published the latest update to the Bank Financial Strength Dashboard, which covers a huge range of information relevant to each bank’s financial resilience. From a property perspective, one of the highlights was that the "non-performing housing loans" ratio is very low for all main banks. This measures the total value of loans that are either impaired (where the bank may not get all of the agreed principal and interest repayments) or 90 days past due but not yet impaired, as a percentage of all housing loans.
This figure for all main banks came in at 0.2 percent or less, which reflects careful lending practices, the LVR speed limits, and the strong economy (e.g. low unemployment).
Then on Tuesday, the lending statistics for October were published, covering lending by LVR, borrower type, and loan type. There were two key points - first, lending flows in October were higher than a year ago. Second, that rise came despite lenders still staying well away from the LVR limits as they were at the time, with only 10.3 percent of loans going to owner-occupiers without a 20 percent deposit, and only 0.4 percent of loans going to investors without a 35 percent deposit.
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The Reserve also reported a further rise in lending to first-home buyers.
So, how can lending flows be rising whilst banks are still showing a cautious approach to new loan standards? One explanation would be that the share of mortgage applications being approved is rising; because only the best borrowers are coming forward. These higher-quality borrowers would have a sufficient deposit, be able to meet more stringent income and expense testing, and could service the debt at a hypothetical mortgage rate of 7 percent or more.
Given all of that, then, it was little surprise that the RBNZ announced a relaxation of the LVR rules this morning. From 1st January 2019, up to 20 percent (previously 15 percent) of new lending to owner-occupiers can have deposits of less than 20 percent, and up to 5 percent of loans to investors can have deposits of less than 30 percent (previously 35 percent). It seems likely that this will welcome in some borrowers who were previously locked out of the market, and could produce a strong number of future property sales.
But even that is not a clear-cut outcome. After all, lenders may choose to continue on their cautious path, especially since today’s Financial Stability Report also highlighted the RBNZ’s view that “higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient”. In other words, a requirement in future for the banks to hold higher capital buffers would tend to dampen lending flows.
Kelvin Davidson is senior researcher at CoreLogic NZ
