Reserve Bank confirms loan-to-value ratios will return in 2021

The RBNZ does not expect the reimposition to have much impact on house prices.
The RBNZ does not expect the reimposition to have much impact on house prices. Photo credit: Getty

The Reserve Bank (RBNZ) has confirmed limits on risky property lending are officially on the way back, but does not expect they will have much impact on house prices.

It has started consultation on reimposing loan to value ratios (LVRs) from March next year.

RBNZ Deputy Governor Geoff Bascand said the economy and property market had recovered stronger than expected and the amount of riskier lending had increased.

"Lending at higher LVRs has risen, particularly for investors, and there are signs that this trend is accelerating."

"The Reserve Bank is concerned that increases in highly-leveraged borrowing, if continued, could lead to emerging risks to financial stability."

The LVRs were suspended in April as part of a raft of measures to support the economy and households when COVID-19 struck.

They were due to be on hold for at least a year, but their absence has been blamed in part for the surge in house prices and exacerbating the difficulty of would-be first home buyers to be able to afford a property.

The RBNZ said the LVRs would be at the former levels, with retail banks limited to no more than 20 percent of new lending to owner-occupiers with less than a 20 percent deposit, and no more than 5 percent of new lending to investors with less than a 30 percent deposit.

The consultation process is largely academic given that all the main retail banks have already reinstated the LVR limits in anticipation of the RBNZ move.

The RBNZ has always maintained the LVR restrictions are about ensuring retail banks are financially sound, and not a means of cooling house prices or the improving housing availability or affordability.

"By placing limits on high-risk lending, LVR restrictions help make household and bank balance sheets more resilient to a correction in property values if it occurs," Bascand said.

In its consultation document, the RBNZ said it did not expect the reimposition of the LVRs to have much impact on house prices.

"We consider a reasonable estimate of the impact on house prices of reinstating LVR restrictions on 1 March 2021 would be a reduction in house prices of 1-2 percentage points."

"However, given housing markets can suffer from 'irrational exuberance', LVR restrictions should help to lean against a possible further acceleration.

The RBNZ said it was also looking at the prospect of debt to income ratios (DTIs), which would link lending to a borrower's income. A previous National-led government knocked back an RBNZ bid in 2016.

Last month RBNZ governor Adrian Orr said the central bank to have DTIs in its toolkit for future possible use.