LVRs are coming!

The RBNZ has now officially announced maximum loan-to-value ratios (LVRs) for the public in a speech here.

They noted that the run up in house prices has increased the probability of a sharp decline in house prices – an event that may in turn lead to instability in the New Zealand financial system.  Their thinking is:

“The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.”

In this way it is pre-emptive – current credit growth is moderate, but they want to ensure they don’t lose control of credit growth in a way that makes the entire financial system (which is implicitly insured by government) fragile.

The Bank makes a specific point of saying that the concern is around mortgage borrowing, and a run up in house price expectations associated with already realised increases in house prices, that they are targeting with macro-prudential policy – as unlike an increase in the OCR which is targeted at broad demand, it is a specific lift in demand for housing that is driving current house price appreciation.  It is not that NZ households have become more willing to spend per se – the concern is that NZ households, and the banks willingness to lend to households, is focused excessively on housing assets.

I will admit that I am not completely sold on the argument they have put forward for LVRs, and I’m perplexed at why they are communicating it by discussing house prices (thereby mixing it with issues of affordability for the public) rather than simply stating that they are of the view that banks are taking on too much risk in terms of mortgage assets at present.

But they have clearly laid out their argument, and they have made sure that they communicate it rather than just doing it.  And this is great – I am alway impressed by how transparent our central bank is!  I think that this helps them when it comes to introducing specific, one-off, policies such as the current LVR limts.

  • John Dickson

    I haven’t followed this debate, but has anyone seen
    the RB’s evidence that “banks
    are taking on too much risk in terms of mortgage assets at
    present…” empirical question surely?

    • http://tvhe.co.nz/ Matt Nolan

      Agreed. I’ve said in the past I prefer to view it as an insurance mechanism given a recognition that the government is acting as a lender of last resort – and as a result I would prefer to see it discussed that way, instead of in terms of “prices”.

      • John Dickson

        so the RB logic is that the nature and/or magnitude of this rational/irrational lending by banks is driving material system risk. so centrally cap it. be interesting which potential lender’s may lose at the margins.

        • http://tvhe.co.nz/ Matt Nolan

          Indeed, my impression is that they are trying to get banks and borrowers to take into account risk they are currently ignoring.

          Agreed that the distributional consequences will be interesting, over time the Bank will likely to be keen to create tools that are more direct when it comes to dealing with this quantum of missing risk they are chasing :)

    • Shamubeel Eaqub

      Just a bit of context from the banks’ general disclosure statements. For example:

      - KiwiBank’s lending book in the notes for LVR rose by $2.5b in the year to Mar-13. Of which $1.8b is over 80% LVR. 19% of their book over 80% LVR.

      - ASB, rose by $2.9b of which $2.4b is over 80% LVR. 21% of their book is over 80% LVR.

      These are net of repayments, so not all new lending.

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