LVR restrictions likely to be a permanent tool, says RBNZ

Restrictions on loan-to-value ratios are likely to be a ‘permanent tool’, according to Reserve Bank of New Zealand governor Adrian Orr.

Orr says that the bank’s policy may need to change in response to market needs, but that the loan-to-value restrictions have not led to a decline in first home buyers and are likely to become a permanent part of RBNZ’s policy.

Restrictions on loan-to-value ratios (LVRs) were introduced in response to a rapid rise in house prices and aimed to decrease the amount of borrowers vulnerable to economic or financial shock, and to provide a buffer in the face of a sudden housing downturn that might affect indebted home owners and investors.

According to Orr, LVR restrictions are a ‘blunt tool’ which is meant as a ‘wake-up call’ to banks which need to look carefully at their lending practices. Most crucially, they aim act as a speed limit and to restrict lending to those who would be unable to sustain a mortgage in the event of a recession or an increase in interest rates.

Speaking to NZ Adviser, Kris Pederson from Kris Pederson Mortgages says LVR restrictions being utilised on a permanent basis was an expected development and one that will keep the market in balance for the foreseeable future, but that adjustments to the framework may need to be made.

“They have kept the property market in check and kept the banks stable, but they’ve also created quite a lot of distortions,” says Pederson.

“The people who have benefited from them tend to be people with high equity levels, and the people affected negatively have been first home buyers. It’s easier now for first home buyers to get a new build in comparison to buying an existing house, but building is a more risky proposition. Banks don’t tend to do long term pre-approvals, and so some people sign up to something they may qualify for now, but may not qualify for once the development has been built. So one can argue that the LVR rule has made some parts of the market safer, but has made other parts more risky.”

“The real question is how stringent they continue to be on the restrictions,” Pederson continues. “The Reserve Bank was never going to pull them back after two or three years and let the market go back to what it was before. The question now is how long they’re going to keep them in the current framework.”