ANZ economists have predicted that there is a significant chance that the Reserve Bank of New Zealand (RBNZ) will announce a “small loosening” of its loan-to-value ratio (LVR) restrictions in November.
In ANZ’s latest Property Focus, ANZ chief economist Sharon Zollner, senior economist Miles Workman, and economic statistician Kyle Uerata said that there were a lot of “moving parts” that could affect the regulator’s decision.
“Both we and the RBNZ expect house price inflation to remain modest relative to previous cycles over the next few years, but frankly, a wide range of outcomes is plausible given the recent drop in mortgage rates, possible developments in credit availability, the softening economy, and policy changes,” the economists wrote in the report.
They added that RBNZ would either loosen LVR restrictions in November or decide after analysing the results of the recent mortgage rate moves.
“But if we had to make a call either way, we think a small loosening is more likely,” they said. “In the worst case scenario the RBNZ could naturally change course – the May 2020 FSR would be the next obvious opportunity. But no doubt they’d rather get it right first time. Wouldn’t we all, but with everything that’s going on, anyone who tells you they know with great confidence where the housing market is headed over the next 12 months may not be an entirely disinterested observer.”
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The economists said they don’t expect the move to have a significant impact on house price inflation, but it could result in higher household leverage.
“It’s fair to say there is perhaps a little more uncertainty than is typically the case for the housing market outlook more broadly. Perhaps the path of least regrets for the RBNZ on pure financial stability grounds is to hold the LVRs steady until after the dust settles, and it’s a little clearer how all of the above is netting out,” they said.
“But on the other hand, a bit of housing strength wouldn’t go amiss in helping the RBNZ get the economy’s animal spirits going again and helping get CPI inflation back up to the midpoint of the target band. [It] must be tempting to give it a little more rein."
RBNZ is expected to publish a review of the LVR restrictions in its next Financial Stability Report (FSR) on November 27.