The November Financial Stability Report was released yesterday morning.
Reserve Bank Governor Adrian Orr has stated that financial system vulnerabilities remain elevated and more effort is required to ensure that the system remains resilient over the longer-term.
With this in mind, the RBNZ decided to keep the loan-to-valuation ratio restrictions as they are. RBNZ feels that since the introduction of the restriction, it has helped reduce the amount of excessive household mortgage lending and therefore, has helped with banks' resiliency.
The Governor also noted that bolstering the long-term resilience of the financial system will be one of the key focuses going forward.
With the Capital Review proposal due on the 5th of December, we can expect to see increases in the capital requirements for the banks. This will create a buffer for them to absorb expected operation losses going into the next couple of years.
We see this as a key driver of mortgage rates staying where they are, or possibly increasing slightly. The combination of this new capital requirement, along with the capital requirement imposed earlier in the year by the Australian Prudential Regulation Authority (APRA) for the Australian banks, will create a need to retain and create margins.
No doubt, this is why a couple of months ago, Winston Peters spoke out urging Kiwibank to become more competitive in the banking sector as this would be a perfect time.
So where are we at with the loan-to-value ratio restrictions? At the moment, investors are still required to have a 30% deposit while owner-occupiers are required to have 20%. Banks are restricting high-LVR lending to no more than 5% of their total new investor lending, and no more than 20% of their total new owner-occupier lending.
More information on this can be found on the RBNZ website.