Tighter mortgage lending rules will impact first-home buyers - economist

The Reserve Bank has the green light to tighten mortgage lending rules, including introduction of a debt-to-income restriction. 

But Kiwibank chief economist Jarrod Kerr says while tougher restrictions would alleviate it's concerns around risky lending, tackling demand is not the solution to the affordability crisis.

In a statement released on Tuesday, Finance Minister Grant Robertson announced an agreement had been reached with the Reserve Bank to update the 'Memorandum of Understanding' (MoU) agreement on macro prudential tools.  

Giving the Reserve Bank flexibility to respond to financial stability risks, a 'debt serviceability tool' could be used as required, but this should "not duly impact first-home buyers", Finance Minister Grant Robertson said.  Under MoU wording, the Reserve Bank would need to "avoid negative impacts as much as possible" on first-home buyers.   

Amid concerns around unsustainable house prices and financial stability risks, the statement also acknowledged the Reserve Bank's proposal to tighten loan-to-value ratio (LVR) rules. 

LVR rules restrict how much banks can lend to low-deposit borrowers. If implemented, the amount of new lending at LVRs greater than 80 percent (for deposits less than 20 percent) would drop to 10 percent, from the current 20 percent.

Grant Robertson said it was "sensible" for the Reserve Bank to consult on lending rules, having told the central bank in February to consider house prices under monetary policy decisions. 

"We’ve already made adjustments to Loan-to-Value Ratio (LVR) restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending," Reserve Bank Deputy Governor Geoff Bascand said in a statement.

Debt-to-income (DTI) restrictions would link borrowing limits to income levels to support sustainable borrowing. The Reserve Bank would also look at introducing an 'interest rate floor', under which banks test mortgage serviceability at a set interest rate.

The Reserve Bank said it was to make sure borrowers are able to withstand future economic and financial conditions.

“If house prices were to fall, some buyers could face the possibility of negative equity - which means the value of their property is below the outstanding balance on their mortgage," Reserve Bank Deputy Governor Geoff Bascand said.

Noting LVR rules include exemptions for new-builds and the First Home Loan available through Kāinga Ora, Kiwibank chief economist Jarrod Kerr said if "speed limits" on new mortgage lending go ahead, first-home buyers will be impacted.

"It will have an adverse impact on first-home buyers… it would be great to see them exempt," Kerr said.

He said tightening of mortgage lending will limit demand and prices. But low supply directly impacts house prices. For many first-home buyers, the main barrier is not inability to service a loan - it's saving a deposit.

"We're playing around with demand-side measures - we should be focusing more on supply," Kerr said.

The Reserve Bank said it would start talking to banks about LVR restrictions later in August, with a view to introducing new restrictions from October 1.

Introducing DTI restrictions would take longer. Consultation on these, along with interest rate floors would start in October.  

"It is important to note that any decision to introduce DTIs would only happen after a full public consultation and Regulatory Impact Assessment, which would take a minimum of three months," Finance Minister Grant Robertson said.