New Zealand central bank to undertake 'modest easing' of home loan restrictions

New Zealand's central bank on Wednesday said it would unwind some restrictions on home loans to partly offset the impact of planned government curbs on the country's housing market, which has cooled in recent months. In its half-yearly Financial Stability Report, the Reserve Bank of New Zealand (RBNZ) said it would undertake a "modest easing" of loan-to-value ratio (LVR) restrictions from Jan. 1, 2018. The restrictions were stepped up last year.
The changes would have a "negligible" impact on monetary policy and would help mitigate some of the impact from new government policies on housing, the central bank said. A ban on foreign purchases of existing homes is due in early 2018. House prices have risen more than 50 percent nationally over the past 10 years, and almost doubled in Auckland, New Zealand's largest city, but have more recently cooled as a slowing economy and home loan restrictions curb demand.
"Over the past six months, pressures in the housing market have continued to moderate due to the tightening of LVR restrictions in October 2016," RBNZ Governor Grant Spencer said. "Housing market policies announced by the government are also expected to have a dampening effect on the housing market."
Spencer said the central bank had no set schedule for removing all the LVR restrictions and that they would look to see house prices continue to stabiilise before scrapping them. The central bank still favoured having limits on debt-to-income loans in its macroprudential toolkit, he said, but it had agreed with the government to postpone any consideration of such tools.
The changes in LVR restrictions come earlier than many in the market had expected and drove the New Zealand dollar up to $0.6930 from about $0.6910 just ahead of the RBNZ release. It was last at $0.6904. As part of the changes, the RBNZ will allow banks to make up to 15 percent of new loans to owner occupiers with LVRs of more than 80 percent, up from the current cap of 10 percent. And up to 5 percent of banks' new loans to investors can be made with LVRs of more than 65 percent, compared to 60 percent currently.
Analysts expect these changes to have a limited impact overall. "All other things equal, the imminent relaxation of the restrictions will help put a floor under housing activity and prices," ASB said in a research note. "We don't expect the eased restrictions to spark a return to strong house price growth." Spencer said the central bank had been under pressure for several months to look at the issue as the market was cooling.
In Auckland, house prices saw their biggest fall in nearly seven years in October and the number of properties sold across New Zealand also fell. "The market has been coming off really since mid-last year and so we have been considering it particularly as Auckland was flattening out and indeed going negative," Spencer told reporters. "If we don't look at some change, a move to start removing (restrictions) in these sort of conditions, then when are we going to look at them?"