Box A: Initial impact of adjusted LVR restrictions
In November 2015, the Reserve Bank introduced changes to the policy on high-LVR mortgage lending by registered banks, tightening restrictions on Auckland investors while loosening restrictions outside of the Auckland region. These changes were designed to decrease the rate of growth in Auckland house prices, and hence reduce the probability and magnitude of a subsequent correction, and to improve the resilience of bank balance sheets to a housing market correction. In loosening LVR restrictions outside of Auckland, the Reserve Bank acknowledged that risks outside of Auckland had not increased significantly since the implementation of initial LVR restrictions in October 2013, with house prices having remained fairly stable relative to incomes.
The Reserve Bank expected the policy to have a short-run impact on housing market momentum in Auckland, lowering house sales by around 8 percent and annual house price inflation by 2-4 percentage points. Outside of Auckland, house sales were expected to be 4 percent higher and house price inflation 1 percentage point higher. National housing credit growth was expected to be 1 percentage point lower. These impacts were estimated to be temporary, occurring over a one-year horizon and gradually fading thereafter. LVR changes were expected to have a more enduring impact on banks’ balance sheet resilience, by reducing the share of outstanding investor loans at LVRs of above 70 percent.
Since November, banks have quickly adapted to the new speed limits, with aggregate high-LVR lending well below the respective requirements (figure A1). The revised LVR restrictions exempted several extra categories of lending, including for non-routine property remediation (e.g. leaky homes) and combined collateral exemption. Uptake of the combined collateral exempt-lending has been particularly high, at about 20 percent of Auckland investor lending. This allows banks to exempt lending to borrowers with multiple collateral types if the aggregate loan does not exceed 70 percent of the value of Auckland investor property plus 80 percent of the value of other property.
Figure A1: High-LVR bank speed limits (% of commitments after exemptions)
Source: RBNZ New Residential Mortgage Commitments Survey, RBNZ private bank reporting data.
Note: Banks’ compliance with the new LVR restrictions will be first measured over the November 2015-April 2016 period. The data presented here cover the period to end-March, and it is likely that there will be some revisions to the data once the full compliance period has finished. Dashed lines refer to respective speed limits.
Auckland house sales fell more sharply than expected following the implementation of the policy, dropping 19 percent between November 2015 and February 2016 (figure A2). It is likely the housing-related government tax changes, together with an apparent reduction in offshore demand due to global financial market volatility and more rigorous enforcement of capital controls by Chinese authorities, also restrained housing demand over this period. The fact that ex-Auckland house sales also declined, despite looser LVR restrictions, reinforces this view.
Figure A2: New Zealand regional house sales (seasonally adjusted, 3-month moving average)
Note: The shaded area represents the period between announcement and implementation of the revised LVR restrictions.
However, recent data suggest that house sales may be rebounding in Auckland and the rest of New Zealand.
Auckland house price inflation has fallen significantly over the same period, although recent signs point to a potential turnaround (see figure 2.7). The pace of the slowdown was larger than the projected policy impact, reflecting the range of policy and international shocks to the market described above. The increase in house price inflation outside of Auckland is likely due to the influence of broader factors such as low interest rates and strong net immigration.
Near-term indicators of housing credit growth also slowed immediately following the changes to the LVR policy, partly reflecting the greater than expected slowdown in both national house sales activity and price growth over the same period. However, annual growth has continued to increase, and recent signs point to renewed strength in credit growth. Much of this has been driven by robust lending growth outside of Auckland.
Bank balance sheet resilience to severe housing market shocks has strengthened as the share of riskier loan types has fallen. New investor lending at LVRs above 70 percent is down by around one-third (figure A3). Over time, this will reduce banks’ losses on investor loans if there were a severe downturn in the Auckland housing market. However, while average LVRs are declining, a large share of bank lending is taking place at LVRs between 65 and 70 percent, which will partly mitigate this effect.
Figure A3: Nationwide high-LVR investor mortgage lending (% of new investor commitments)
Source: RBNZ New Residential Mortgage Commitments Survey.
Note: High-LVR in the context of investors is defined as an LVR above 70 percent.
As with the initial LVR restrictions, there have been few signs of home lending migrating beyond the regulatory perimeter of LVR restrictions. Specifically, there is little evidence of either avoidance activity by the registered banks or a shift to non-bank financial intermediaries and other sources of finance.