As was the case with the official cash rate two weeks ago, the Reserve Bank (RBNZ) has decided to hold steady with the loan to value ratio (LVR) speed limits as they are. That seems to be the most sensible choice, given signs of an upturn in the housing market – e.g. the continued strength in mortgage lending volumes (on the back of eased serviceability testing) shown by yesterday’s October data release. We now just await the last leg of the RBNZ’s decision trifecta, which is the bank capital requirements on 5th December.
This morning’s Financial Stability Report (FSR) from the Reserve Bank (RBNZ) contained no changes to the loan to value ratio (LVR) speed limits, which means that for at least the next six months (barring a dramatic surprise) they’ll remain at 20% for owner-occupiers with less than a 20% deposit and 5% for investors with less than a 30% deposit. Governor Orr noted in the FSR that the rules had already proved successful in restraining riskier mortgage lending, but also that “there remains the risk that prolonged low interest rates could lead to a resurgence in higher-risk lending”. To us, given emerging signs of a pick-up in the housing market, which have been related to the eased serviceability tests by the banks, no change to the LVR rules certainly seems to be the most sensible decision – it’s not as if housing currently needs a policy-driven boost.
Indeed, other RBNZ figures released yesterday showed that mortgage lending activity remained pretty solid in October. There was $6.1bn of lending last month, up by $550m from a year ago, with both owner-occupiers and investors contributing to the result (see the first chart). The re-emergence of growth in investor lending is really noteworthy, after a year or so of declining activity – and is also consistent with the stronger investor activity shown by the CoreLogic Buyer Classification series recently (in turn driven by factors such as rising rents/yields, and low returns on alternative assets, e.g. term deposits).
Turning to the data relating to the LVRs, the second chart shows that low deposit lending only accounted for 12.0% of owner-occupier activity in October, well below the 20% speed limit and even the internal 15% that the banks reportedly like to adhere to (i.e. a 5% buffer compared to the actual limit). On the basis of these figures, the RBNZ may have seen little point in raising the speed limit further, because it’s not really biting even at its current level. Meanwhile, for investors, low deposit lending was again pretty much non-existent in October (albeit it did tick up slightly).
More generally, there will no doubt be some disgruntled, would-be home-owners/investors out there who have been locked out by the rules put in place by the RBNZ in recent years. However, alongside the supportive economy (e.g. low unemployment) these regulations have certainly helped to put NZ’s lending environment on a safer footing – for example, across all the main banks, the latest figures from yesterday’s Financial Strength Dashboard show that non-performing loans remain very low (see the third chart). An absence of mortgage repayment distress is also shown by the low numbers of mortgagee sales in recent quarters (see the fourth chart).
Overall, with the OCR decision and FSR now out of the way, there’s only one leg of the RBNZ’s late-2019 trifecta left to go, which is the decision around bank capital standards on 5th December. If enacted, these rules would almost certainly result in lower credit supply and/or higher mortgage rates than otherwise, with our discussions at the banks suggesting the effects could start to bite from 2021, if not late 2020. However, that leaves a window over the next 12 months or so for better lending volumes and gently rising property market sales activity.
* Loans that are either impaired (principal and/or interest won’t be repaid in full) or 90 days overdue but not yet impaired, divided by total stock of loans.