Bringing loan-to-value ratio restrictions back will take 'some but not all' heat out of housing market - expert

The Reserve Bank plans to bring back LVR restrictions from March.
The Reserve Bank plans to bring back LVR restrictions from March. Photo credit: Getty.

Bringing loan-to-value restrictions back in will take some, but not all of the heat out of the housing market, an economic forecaster says.

In a half-yearly Financial Stability report released on Wednesday, the Reserve Bank confirmed that loan-to-value ratio (LVR) restrictions will be reinstated from March 1. In the year to October, average house prices grew 14 percent nationwide, up from 4 percent the year before. 

Infometrics chief forecaster Gareth Kiernan said recent data shows there's been a big increase in the amount of lending to investors with a deposit of between 20-to-30 percent.

"All the major banks have already moved to effectively put LVRs back in place... this will take some (but not all) of the heat out of the housing market over the coming months," Kiernan said.

The household debt-to-income ratio: how much people borrow versus how much they earn, is currently around 166 percent. The Reserve Bank report said over the past decade, household debt has risen by an average of 6 percent a year, outpacing the rise in incomes.

"Alongside the investor lending, the high debt-to-income ratio area is one area of risky lending that's shown through over the last 18 months... even prior to COVID, it was becoming quite an issue," Kiernan said.

The Reserve Bank considered debt-to-income restrictions as additional tool in 2017 but for various reasons, weren't introduced. Results from a hypothetical mortgage borrowing survey indicated banks were willing to grant higher debt-to-income loans to comparable borrowers than in 2018, with the average debt-to-income increasing from 4.8 to 5.3. 

"The renewed focus on housing affordability and the continued increase in debt-to-income ratios could mean [it] takes another look at getting Government approval to introduce them," he added.

The Reserve Bank noted that house prices have continued to rise more than incomes and rents.

"The nationwide house price-to-income ratio rose to 7.7 in October from 6.8 a year earlier, driven by strong growth in the Auckland house price-to-income ratio, which currently sits around 10.3," the report said.

It said a stable labour market, falling mortgage rates, Government policy including the wage subsidy and the strength of the housing market helped to reduce financial stress on households. However, some household sectors are more vulnerable. These include people still on a mortgage holiday and low-deposit borrowers.

"Around 1.5 percent of mortgage lending currently remains on a payment deferral and banks are actively working with customers to reduce this, through loan restructures or alternative hardship arrangements," the Reserve Bank said.