NZ: To LVR or not to LVR? - Westpac

With the New Zealand’s housing market continuing to slow, there have been calls for the Reserve Bank’s loan-to-value restrictions to be rolled back, notes the research team at Westpac.

Key Quotes

“But while lending restrictions are playing a role, the more significant factor that has caused the housing market to cool is the rise in borrowing rates over the past year. In addition, the financial risks that lending restrictions aim to address haven’t gone away, meaning the RBNZ won’t be in any hurry.”

“The housing market has continued to lose steam. Sales have fallen 25% over the past year, and house price growth has slowed to just 1% on a nationwide basis. This slowdown has been the sharpest in Auckland, where prices have fallen 4% since the start of this year. However, housing market conditions have been softening across the country.”

“This slowdown in the housing market has raised questions about whether the Reserve Bank will now loosen the loanto-value lending restrictions (LVRs) on home lending. We think that this suggestion is premature. LVR settings hinge on the degree of risk to the financial system. And at this stage, we’re not really seeing the evidence that risks around highly leveraged borrowing and debt have materially eased.”

“Putting it all together, the case for loosening the LVR limits is not compelling at this time, especially with the financial stability risks stemming from the housing market still a dark cloud on the economic horizon. While lending restrictions will be eased at some point, their eventual roll back is likely to be gradual and is likely to be preceded by a period of consultation.”