Reserve Bank backs down on loan rules

Kirk Hope
Grant Spencer

The Reserve Bank has tweaked its loan-to-value policy on residential lending to exempt new construction.

It follows weeks of lobbying from the construction industry warning of falling work levels, job losses and soaring house prices exacerbated by low supply.

New residential construction loans will now be exempt from the loan-to-value restrictions introduced from 1 October, Reserve Bank deputy governor Grant Spencer says.

“The Reserve Bank has recently consulted with the building industry and banks on the impact of LVR restrictions on residential construction activity,” Mr Spencer says.

“While high LVR construction lending is only about 1% of total residential lending, it finances about 12% of residential building activity.

“This exemption means that low deposit lending will fall outside the 10% speed limit if it is financing the construction of a new house or apartment.”

“This exemption will help to support the supply of new housing and, in doing so, reduce some of the pressure arising from excess demand in the New Zealand housing market.”

The New Zealand Bankers’ Association has today welcomed the Reserve Bank’s move to exempt new residential construction loans from the loan-to-value (LVR) restrictions it introduced on 1 October.

“We’ve said all along that supply has always been the issue in parts of the housing market, not the availability of cheap credit,” said New Zealand Banker’s Association chief executive Kirk Hope.

“We agree that this move will help to support the supply of new housing and reduce pressure on demand in the New Zealand housing market. We support any moves to address the supply issue.

“The Reserve Bank’s response shows flexibility and an ability to respond to industry concerns. We applaud them for taking on board the feedback provided by banks and the construction industry.

“This move complements the government’s efforts to address the housing supply issue in Auckland,” Hope said.  

 

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14 Comments & Questions

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This decision is going to put a lot of pressure on an unsavoury OCR hike next year.

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Kiwibank just dropped their rates. 'Expert economists' really don't have a clue. The pressures in Auckland are foreign money. The LVR only makes it easier for these foreign 'investors'. Wheeler has shown himself to be misinformed.

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Within 3 months, the NZ Reserve Bank finally realise their ruling on the loan-to-value (LVR) restrictions has been a very wrong move....

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Didn;t listen to the PM or to common sense !! Don't worry savers, NZ won't be the only country in the world to raise interest rates.......Does Wheeler really want our dollar to be more expensive than our largest trading partner, Australia, I think not ! Merry Xmas savers Worry NOT !

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Your comment lack logic - the point of the LVR restrictions is to avoid the need to raise interest rates!

If Wheeler had listened to Key or to Labour and exempted first home buyers, then the policy would have become ineffective because first home buyers were a large proportion of the low LVR segment. Then raising interest rates would have been the only option available.

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Now what? Got a small deposit - build a house - don't buy one. More distortions for the market.

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This is all about avoiding distortions in the market. Encouraging new housing helps stabilise house prices by adding to the supply of housing rather than bidding up the prices of existing housing.

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AT last, an attempt to increase SUPPLY! Now all that's needed is to reign in the greedy local authorities (or at least the biggest one) from "Development Levies" and just worry about rates!

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Backtracking, U-Turn, Revisiting, Got it all wrong, Scratching his head....

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... it's almost inevitable that the OCR, mortgage rates and the kiwi will rise next year. The LVR restrictions were intended to knock some wind out of the sails of housing inflation - for all of the hand-wringing they were at least a targetted tool rather than an all encompassing rise in rates across the board and possibly having a similar effect on housing as a 15 basis point rise in rates.

Having mortgage rates at generational lows won't last forever - the rise has been signalled for some time and it's been delayed a long time by patchy data. However, the case for continuing to have rates this low and encouraging buyers to enter where they have no leeway in terms of cashflow to cover an increase in rates is not going to end well for some of the folk chasing the New Zealand dream of having their own piece of dirt.

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Those 'low' interest rates you refer to in NZ are quite high globally. How much more opportunistic foreign cash will flood in if they rise? Wheeler has to try and balance that negative impact too.

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You are correct in that the rates relatively high compared to the Euro Zone and the US Treasury Rates. Given that parts of the Euro Zone are for want of a better word 'munted' (Spain, Greece and a few other come to mind) although places like Austria are doing relatively well that's to be expected.

Printing trillions of dollars thru Quantative Easing will do that to US bonds as well.

The reason that we have one of the fourth most traded currencies and a home for all that hot money from overseas is that us kiwis are obsessed with gorging ourselves on debt for non productive assets rather than saving or investing in productive ones.

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Wrong..

The main reason NZ currency is traded more than most is it can easily be manipulated by speculators, due the relative size of our economy.

Its time the government(s) put a tax of trading currency, then the exporters would have more certainty trading. Unfortunately, this comes second to large speculating banks that are more powerful than most countries.

Explained easy with government bail outs, when most other businesses have to stand on their own two feet.

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Come on Mr Hutching - why use words like 'backs down'.......you journalists really do not think things through.
In business if a strategy is not working you tweak it - so why would the Reserve Bank be any different?

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