Reserve Bank proposes easing loan-to-value restrictions as house prices drop

The Reserve Bank of New Zealand (RBNZ) is proposing easing loan-to-value ratio (LVR) restrictions. 

LVR restrictions place a cap on how much a bank can lend relative to a purchase point. 

In November 2021, the RBNZ tightened the settings so only 10 percent of a bank's lending can go to owner-occupiers with a deposit of 20 percent or less. This was down from 20 percent. 

At the time RBNZ was concerned by unsustainable house price growth which it said posed a threat to the stability of the economy. 

But massive increases to the Official Cash Rate (OCR) and increasingly turbulent economic conditions have seen house prices drop substantially. 

RBNZ deputy governor Christian Hawkesby said the drop in price means the LVR settings can now be eased. 

"Our assessment is that the risks to financial stability posed by high-LVR lending have reduced to a level where the current restrictions may be unnecessarily reducing efficiency. 

"In particular, impeding the provision of credit to some otherwise creditworthy borrowers, which is not proportionate to the level of risk that we see," Hawkesby said. 

He said house prices have dropped towards "a level that is more consistent with medium-term fundamentals". 

"As a result, while house prices may continue to fall, the probability of a further large correction in house prices has reduced. Alongside this, lending conditions have tightened significantly as banks’ debt servicing assessments allow for higher interest rates."

The RBNZ is proposing to ease LVR restriction from June 1 from a 10 percent limit for loans with LVR above 80 percent for owner occupiers to a 15 percent limit. 

The LVR restrictions for investors would also be eased from a 5 percent limit for loans with LVR above 60 percent to a 5 percent limit for loans with LVR above 65 percent.