Last week the RBNZ published responses to submissions received on its proposed high-LVR ‘speed limits’ and has updated the banking supervision handbooks to enable implementation. The main change was to give large banks a little more initial time (a 6-month rolling average vs. a 3-month average) for high-LVR loan percentages to fall below whatever speed limits the Bank sets. The prevalence of mortgage pre-approvals means that banks may not be able to meet a speed limit quickly given their outstanding commitments to provide finance.
As in the original proposal, the RBNZ is intending that banks adhere to the “sprit” of the restrictions. The RBNZ has given a “non-exhaustive” list of ways banks could avoid the restrictions (including putting up additional collateral), and would take action if it viewed banks were actively trying to get around them. Exactly where the lines of violating the spirit lie is very vague, and banks are likely to tread carefully given the LVR restrictions are linked to banks’ conditions of registration.
But that still leaves private individuals and politicians free to do what they want to achieve their respective objectives. Some potential borrowers may simply borrow money from relatives (who could well rely on a mortgage for that funding) or expand their credit card portfolio. Other funders are likely to crawl out of the woodwork. The National Government has made moves to make it slightly easier for some first-home buyers to achieve their home-ownership aspirations. The Labour Party’s policy of building 10,000 low-cost homes a year could be impacted by future implementation of the LVR policy, and some work-around would be quite conceivable to bolster the success of the building programme.
We do think it is very likely the RBNZ will implement the LVR restrictions. The most likely window is from any moment through to the release of the next Financial Stability Report on November 13. Given the RBNZ’s past approach of separating financial stability announcements from monetary policy ones, we discount an announcement at the 12 September MPS release.
The policy is primarily intended to make banks more resilient to a crash by limiting the number of loans with a small amount of owner equity. It is about having a thicker mattress at the bottom of the cliff rather than a stout fence at the top. But it might take the edge off house price growth to the extent that some people are excluded from the market and the vacuum is not readily filled by equity-laden buyers. Even so, we expect the RBNZ will still lift the OCR from March 2014 as the inflation outlook and financial stability concerns will both point to the need for higher interest rates. Last week’s retail spending growth, with strong core spending, highlights that the wider economy is gaining momentum with inflation to eventually follow suit.
