The Reserve Bank has eased restrictions on Loan to Value Ratios (LVR), but does not expect this to fire up a flattening housing market.
The bank announced this week that it would lift its ‘speed limit’ on high LVR lending (over 80%) for owner-occupiers from 10% of new lending to 15% of new lending. It also eased the deposit requirement for high LVR lending for rental property investors from 40% to 35%. It left its high LVR speed limit for rental property investors at 5% of new lending. But it gave no indication that there would be any further easing.
These new LVR levels will apply from January 1, 2018, and it's estimated that they’ll add an extra $1.1 billion in new lending to owner-occupiers over the year. That sounds like a lot, but it’s actually a pretty small number. To compare, there were $60.9 billion total new lendings last year and the total mortgage book in New Zealand is worth over $240 billion.
Many real estate agents and property investors are disappointed with the small breaks, but the Bank was cautious about loosening further – given the risks of another break out in house prices.
"We certainly don’t want to give the signal that it is some sort of green light that the housing market is back on, ” Governor Grant Spencer said of the changes.
"Our expectation is that the housing market is going to remain flat and is not about to resurge again, but there is a little bit more room for high LVR loans, and a lot of that would be taken by first home buyers," he said. "It is more a toe-in-the-water signal and comment that this is no major event that is really going to impact the market.
Spencer doubted the moves would affect the housing market much.
"In terms of a risk of a downward correction, we think that is a low probability because of the underlying housing shortage that we think still persists, particularly in Auckland," he said.
"There are still people coming into the country and not enough houses being built to close that gap. So in that sense, I think as long as that fundamental shortage exists it is very unlikely you have any real risk of the tanking of the housing market."
Meanwhile, the new Government is pushing ahead with plans to ban foreign buyers of existing homes, to extend the bright-line test to five years from two years, and to outlaw negative gearing by landlords. It also tightened Overseas Investment Office rules on foreigners buying farms, in an attempt to exclude larger lifestyle blocks from being sold to non-residents.
The Reserve Bank is also expected to leave the Official Cash Rate on hold at 1.75 percent until well into 2019 as inflation remains under control, although observers should watch for the appointment of a new Governor in March, who may be more ‘dovish’ and keep rates on hold for even longer.