LVR regulation not the favoured option
(07 March 2013 – New Zealand) Regulating loan-to-value ratios (LVR) would not be the Reserve Bank of New Zealand (RBNZ)’s favoured option according to the New Zealand Bankers’ Association (NZBA).
NZBA Chief Executive Kirk Hope believes the macro-prudential tools the central bank is working on will be used as a last resort, if at all.
'While they may be in the throes of preparing the tool I don't get the sense they are overly convinced about it,' said Hope.
Restrictions on high-LVR housing loans would typically be applied when growth in such lending, and in house prices, was judged to be excessive, the RBNZ said, with the objective of dampening the housing cycle and strengthening the resilience of banks and households.
But the effectiveness of this approach might be limited by the fact that LVR restrictions - unlike the other tools it is working on - do not affect the cost of borrowing but rather restrict the ability of some would-be borrowers to borrow, it said.
'While this may constrain some households, it is also possible demand from others with sufficient wealth might continue to drive house price growth.'
The RBNZ also acknowledged the risk that borrowers bypass New Zealand banks and borrow from foreign banks or entirely unregulated lenders, as in the days when solicitors' trust accounts were a significant source of home loans.
Hope said that when looking at the limited experience of LVR restrictions in other developed countries it was important to bear in mind the differences between their circumstances and New Zealand's.
Of the other tools under consideration, Hope believes raising the risk weights, and therefore the capital requirements, for lending to a particular sector, such as residential mortgages, would be the Reserve Bank's preferred option.
'They have already implemented it in the agricultural sector.'
'While they may be in the throes of preparing the tool I don't get the sense they are overly convinced about it,' said Hope.
Restrictions on high-LVR housing loans would typically be applied when growth in such lending, and in house prices, was judged to be excessive, the RBNZ said, with the objective of dampening the housing cycle and strengthening the resilience of banks and households.
But the effectiveness of this approach might be limited by the fact that LVR restrictions - unlike the other tools it is working on - do not affect the cost of borrowing but rather restrict the ability of some would-be borrowers to borrow, it said.
'While this may constrain some households, it is also possible demand from others with sufficient wealth might continue to drive house price growth.'
The RBNZ also acknowledged the risk that borrowers bypass New Zealand banks and borrow from foreign banks or entirely unregulated lenders, as in the days when solicitors' trust accounts were a significant source of home loans.
Hope said that when looking at the limited experience of LVR restrictions in other developed countries it was important to bear in mind the differences between their circumstances and New Zealand's.
Of the other tools under consideration, Hope believes raising the risk weights, and therefore the capital requirements, for lending to a particular sector, such as residential mortgages, would be the Reserve Bank's preferred option.
'They have already implemented it in the agricultural sector.'
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