Outgoing Reserve Bank Governor Graeme Wheeler is rejecting clamouring from real estate agents and politicians for restrictions on banks’ high loan-to-value ratio (LVR) residential mortgage lending to be eased.
In a speech entitled Reflections on the stewardship of the Reserve Bank made at the Northern Club in Auckland, Wheeler said LVR restrictions aren’t expected to be permanent, but their removal would require a degree of confidence that financial stability risks won’t deteriorate again.
“However, debt-to-income ratios have risen in recent years, and with the underlying drivers of housing demand – population growth [and] low interest rates – remaining strong and demand outstripping supply, there’s a risk of a housing market resurgence, and a sharp lift in high LVR lending, if LVRs were removed at this time,” Wheeler said.
Wheeler’s due to leave the central bank when his five year term as Governor ends on September 27. He’ll be succeeded by Deputy Governor Grant Spencer for six months until an as yet unknown permanent replacement takes the reins in March.
“LVR restrictions have reduced financial stability risks as house prices became increasingly stretched. Requiring new borrowers to have a greater equity contribution in their house purchases reduced the overall riskiness of banks’ mortgage portfolios,” Wheeler said.
“Nationwide annual house price inflation has declined to 1 percent due to LVR restrictions, the tightening in bank lending, the rise in mortgage rates and increasing concerns about housing affordability.”
Meanwhile, Wheeler said in the absence of major unanticipated shocks, prospects look promising for continued robust economic growth in New Zealand over the next two years.
“The greatest risk we face at this stage relates to the inflated global asset prices and the continuing build up in global debt,” Wheeler said.
“If growth in the global economy slows, we have some scope to buffer our economy. We’ve greater room for monetary policy manoeuvre than central banks in many advanced economies. Our official cash rate is 1.75 percent – above the zero and negative interest rates of several advanced country central banks – and the [Reserve] Bank has not grossed up its balance sheet by buying domestic assets. With a budget surplus and low net debt relative to GDP, there’s also flexibility on the fiscal policy side.”
Wheeler noted that when LVRs restrictions were introduced in October 2013, 21% of the stock of mortgage lending across the New Zealand banking system was at LVRs of 80% or higher. With a third of new mortgage lending at that time happening at LVRs of 80% or higher, the overall stock of high LVR mortgages was “likely to approach” 25%.
“As a result of the LVR restrictions, the stock of highly leveraged loans across the banks’ mortgage portfolios is now around 8%,” said Wheeler.
“While some first home buyers wanting high LVR loans have been affected by the restrictions, banks have given priority to first home buyers within their 10% speed limit,” he added. “Over the past 2½ years the share of first home buyers in real estate transactions has been around 21%, its level in early 2013. Over this period, first home buyers have taken out nearly $21 billion of mortgage loans from the banking system, with 28% of that lending at LVRs greater than 80%.”
More to come.