LVRs could ease further

01 February 2019

Further easing of LVR deposit requirements for property mortgages could follow over the next few years, Reserve Bank Governor Adrian Orr has revealed.

Speaking at the release of the RB’s end-of-2018 financial stability report, Mr Orr said a continuing fall in housing lending risks had enabled the bank to ease LVR restrictions from January  1 this year, and Mr Orr said further easing could follow if risks continued to diminish over the next few years.

The new LVR deposit rules allow up to 5 percent of new mortgage loans to property investors to have deposits of less than 30 percent, down from 35 percent.

However, Mr Orr also revealed the bank’s concerns about high debt levels in the household sector, which he said was particularly true for property investors and households that had recently bought houses.

 “An economic downturn or significant increase in interest rates could put some borrowers under stress,” said Mr Orr.

He flagged a higher possibility that house prices could fall significantly in the future, reducing households’ wealth and borrowing capacity, and making it harder for households to sell their houses to pay off their debts.

However, he said recent slower mortgage lending growth had reduced financial risk somewhat.

Mr Orr said household lending growth had slowed, and fewer mortgages were being provided at high multiples of income or on interest-only terms. This was helping to gradually improve the financial resilience of the household sector.

“We think house price growth will remain low for some time, particularly as some Government initiatives are likely to weaken demand and support supply. The longer that house prices grow slowly, the less likely it is that they will fall sharply in the future.”

Since the RB first introduced loan-to-value ratio (LVR) restrictions in 2013, in response to rising housing lending risk, the LVRs had reduced the number of borrowers who would be forced to sell their houses or significantly reduce spending if they ran into financial problems.

Finally, Mr Orr said high debt and asset prices meant the global economy remained vulnerable to shocks following a period of low interest rates.

A sudden rise in global interest rates or a sharp slowdown in economic growth could lead to a sudden disruption in financial markets, said Mr Orr. Although New Zealand was exposed to global risks through both trade and our banking system’s need for foreign funding, banks had reduced their reliance on foreign funding over the past decade, thus improving their resilience to global risks.

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