The Reserve Bank's six-monthly Financial Stability Report revealed two changes to regulatory policy settings, which will have opposing effects on financial conditions.
The first was the expected easing of the loan-to-value ratio (LVR) restrictions on housing lending. The quota for over-80% LVR loans to owner-occupiers will be raised from 15% to 20%, and the effective LVR cap for investors will be raised from 65% to 70%. Both of these will take effect from 1 January next year.
While household debt levels remain high, the rates of growth in house prices and mortgage lending have moderated to be broadly in line with income growth. The RBNZ noted that “if banks’ lending standards are maintained we expect to further ease LVR restrictions over the next few years”.
We expect the response to these changes will be similar to what we saw after the easing of the LVR limits last November. Banks took up the extra leeway for high-LVR lending, though they maintained a sizeable buffer below the maximum.
There was a small, temporary lift in house price growth, but it’s difficult to separate the impact of the LVR changes from the decline in mortgage rates at the time.
There has been quite a sharp fall in mortgage rates in recent weeks, which could help to boost house prices in the early part of next year just as the new LVR limits take effect. However, other policies aimed at dampening housing speculation, such as the extended bright-line test for taxing capital gains and the impending phasing-out of negative gearing, are expected to keep house price growth contained over the coming years.
The second announcement was that banks will be expected to hold more regulatory capital on their balance sheets. The review of capital requirements has been under way for some time, and today was just a preliminary decision – a consultation paper will be released next month.
Higher capital requirements provide banks with a greater buffer against unexpected losses, but they tend to increase the average cost of funding (as equity is a more expensive form of funding than debt or deposits).
This change would represent a tightening of financial conditions, to go with the easing via the LVR changes.