It has issued its latest Reserve Bank Bulletin, in which Lamorna Rogers has written “an A to Z of loan-to-value ratio (LVR) restrictions”.
Banks are allowed to lend only 10% of their new loans to borrowers with a deposit of less than 20%.
But there are exemptions, such as Welcome Home Loans and loans for new builds, which are not counted in the 10% total.
Rogers said the bank had expected about 15% of banks’ new lending to be to low-deposit borrowers, when exempt loans were included.
But, even when exemptions are included, banks are lending only 7.8% of their new loans to borrowers with equity of less than 20%.
That is a dramatic fall from about 30% before the rules, which Rogers said was worryingly high.
She said indicated the bank had been surprised by the extent of the drop.
“This partly reflects lower than projected use of exemptions, which are averaging around 1% of total lending, compared to projections of 5%. It is possible that the share of high-LVR lending could modestly increase in coming months as banks adjust to the new framework.”
Rogers said the early evidence suggested that the LVR restrictions were having the desired effect on house prices and credit growth. “The housing market has weakened, with seasonally-adjusted house sales down by around 13% over the five months to February.”
She said the value of new housing loan approvals had fallen by a seasonally-adjusted 7% in the three months to February.
The bank was considering the conditions that would justify the rules’ removal, she said. The bank would need to see evidence of a better balance in the housing market.
Rogers said the rules would contribute to financial system resilience by improving households’ abilities to withstand financial shocks.
“The extra equity provides a cushion against falls in house prices, reducing the risk of borrowers falling into ‘negative equity’, where the borrower owes more than the property is worth.”
