A Reserve Bank paper on the impact of its loan-to-valuation restrictions on bank lending on mortgages estimates the three rounds of restrictions collectively reduced house price pressures by almost 50%.
“However, the effect of LVR policy is highly non-linear” but “LVR policy can be very effective in curbing housing prices,” the paper concludes.
It defines the purpose of the LVR restrictions as enhancing the resilience of the financial system and of moderating asset price and credit cycles.
The central bank is charged with ensuring the soundness of the financial system.
The first round of restrictions, limiting bank lending to all those with less than a 20% deposit to no more than 10% of net new lending, came into effect in October 2013 and the paper estimates this had a 3% moderating effect on house prices.
“This moderating effect is broadly similar across both Auckland and the rest of New Zealand,” the paper by Reserve Bank staff Jed Armstrong, Fang Yao and Hayden Skilling (who has since left the bank) says.
“Interestingly, our estimates show that LVR2 (which tightened restrictions on Auckland properties and loosened restrictions elsewhere) did not significantly stop Auckland house prices from rising.”
The second round took effect from November 2015 and required Auckland investors to have at least a 30% deposit and capped bank lending that didn’t meet that criterion at just 5% of net new lending.
In practical terms, that meant almost no lending to Auckland investors with less than a 30% deposit.
But the cap on net new lending in the rest of the country to all those with less than a 20% deposit was relaxed to no more than 15%.
“House prices in the rest of New Zealand increased by 3% due to the relative loosening of the LVR restriction,” the paper says.
The third round of restrictions was introduced in October 2016 and required investors throughout the country to have at least a 40% deposit.
“The moderating effect of LVR3 was clearly seen in Auckland, with a 2.7% reduction in house prices. This LVR3 effect is both statistically and economically significant as during the same period the average house price increased by 5.8%,” the paper says.
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