Mortgage lending has increased for investors and owner-occupiers
The Reserve Bank of New Zealand (RBNZ) is willing to tighten mortgage lending restrictions using loan-to-value ratio (LVR) requirements or additional tools to curtail house prices.
In the latest Financial Stability Report, RBNZ noted that mortgage lending had increased for investors and owner-occupiers amid the housing crisis. Many borrowers were also taking bigger and riskier loans.
RBNZ has tightened LVR requirements in response to higher risk lending against the backdrop of rising prices and to ensure the vulnerability in mortgage lending remains slow. This month, nearly all new loans to investors need to be less than 60% of the property value. Meanwhile, most new loans to owner-occupiers also need to be less than 80% of the property value. With these restrictions, the central bank expects new lending to investors to go slower.
“Since May 01, 2021, a maximum of 5% of new lending to investors can be at LVRs above 60%. Additionally, a maximum of 20% of new lending to owner-occupiers can be at LVRs above 80%,” said RBNZ Deputy Governor Geoff Bascand.
“With these restrictions in place, new lending to investors at high LVRs is slowing. In addition, the recent government housing policy changes could further reduce investor demand.”
The RBNZ also stated that it could implement additional lending restrictions if needed, to lean against housing market risks.
Read more: Reserve Bank: Mortgage lending exceeds $10 billion for the first time
The RBNZ also noted that bank mortgage lending in New Zealand has increased with the rise in house prices, particularly to investors, but also to owner-occupiers. Borrowers have taken on more risk, with a higher proportion of lending at high debt-to-income (DTI) and LVRs.
“This lending is more vulnerable to rising interest rates and falling house prices. For highly indebted buyers, higher interest rates would push up debt-servicing costs significantly and reduce the income remaining for consumption. Highly indebted borrowers are also more likely to sell their properties in fire sales and fuel the perception of a housing market downturn,” Bascand said.
However, the vulnerability in overall mortgage lending remains slow when including existing loans, according to Bascand.
“The share of outstanding mortgage lending with high LVRs has gradually declined since the implementation of LVR restrictions in 2013,” he added. “It would take an extended period of new high-LVR lending to materially increase this share. Additionally, for existing owners, the recent rise in house prices has inflated housing wealth and reduced their LVRs. Stress testing conducted by the Reserve Bank in 2020 showed banks would be resilient in a range of scenarios with high unemployment and lower house prices.
“However, in more severe scenarios, banks’ capital fell below the regulatory minimums and would require significant mitigating actions, including capital injections, to continue lending. This reinforces and supports the decisions that were made as part of the Capital Review to increase bank capital levels.”
