'Incremental' LVR changes to have negligible effect on rate track
The Reserve Bank doesn't anticipate much spillover from its "incremental" relaxation of restrictions on riskier mortgage lending into interest rates, says acting governor Grant Spencer.
The central bank today announced plans to dial back the restrictions on the level of new bank lending to owner-occupiers with less than 20 percent deposit and leveraged residential property investors, citing recent moderation in the housing market as a good time to start moving. The macro-prudential instruments were initially added to the regulator's tool-kit to deal with imbalances in the financial system but interaction also had an impact on monetary policy with the loan-to-value ratio restrictions seen having a similar impact as one or two rate hikes.
Spencer told reporters in Wellington that the estimated impact in 2013 was when the central bank was imposing the limit in total, whereas today's move was a small reduction in the restriction.
"This incremental change will have a negligible effect on the sort of hypothetical OCR track. This isn't removing it in total," Spencer said. "We're just talking about an incremental change here."
Since the LVR limits were first introduced, the share of low-equity loans on banks' mortgage books shrank to less than 8 percent in September this year from 80 percent in October 2013. The Reserve Bank estimates the reduction in highly-leveraged home loans would mean default rates would be about 10 percent lower if there was an economic slowdown and banks' credit loss rates would be about 20 percent lower.
The restrictions have generally been regarded as helping slow the housing market, working in tandem with tighter lending criteria and higher mortgage rates. When they were first mooted in 2013, many commentators and bank executives were sceptical of their efficacy.
Spencer said the decision to ease the limits hadn't been made when the Reserve Bank updated its monetary policy forecasts earlier this month, although it was considered a possibility when assessing the wider housing market.
The removal took some economists by surprise who were anticipating a timeline for the easing but isn't seen as reigniting the housing market as house prices in Auckland remain subdued.
Spencer said the Reserve Bank doesn't see a "collapse of house prices as a particularly high risk" and that any future adjustments will depend on risks posed by the property market to the wider financial system remaining contained.
The announcement was part of the bank's six-monthly financial stability report, which found the country's system remained sound. The report said there were still housing market vulnerabilities, but those are expected to keep easing as the subdued conditions sap those risks.
Spencer said the bank's proposal to add debt-to-income ratio tools to its macro-prudential tool-kit has been postponed until after the Reserve Bank and Treasury discuss an amendment to the memorandum of understanding with the finance minister, and will take place in the context of the second phase of a review of the Reserve Bank Act.
The central bank didn't plan to introduce the debt servicing instrument when it first proposed adding it to the tool-kit, but rather saw it as a useful addition to a future cycle. The financial stability report notes "the level of house prices remains particularly stretched relative to incomes and rents in Auckland and some surrounding cities" and if there was a "disorderly" correction it coiuld amplify an economic downturn.
"The housing market is cyclical and down the track, there will be another housing cycle and debt service instruments may well be appropriate at that time," Spencer said.