Box A: Assessing the impact of LVR restrictions
LVR restrictions are a new policy tool for New Zealand, and there is some uncertainty as to the magnitude of the quantitative impact of the policy. This is especially the case since New Zealand appears to be unique in the use of a speed limit approach. The Reserve Bank’s initial estimates, published in a recent Analytical Note, are that LVR restrictions will result in 3-8 percent fewer house sales, 1-4 percentage point lower house price inflation and 1-3 percentage point lower housing credit growth over the first year that LVR restrictions are in place, than would have otherwise been the case.1
If LVR restrictions had not been implemented, the projected rise in interest rates in the September Monetary Policy Statement would have been higher, placing more upward pressure on the New Zealand dollar. The Official Cash Rate is forecast to increase by 2 percent from 2014 to the beginning of 2016. The impact of LVR restrictions on inflation pressures is estimated to be equivalent to a 30 basis point rise in interest rates over the first year, although with a lesser impact in subsequent years.
The Reserve Bank is closely monitoring market developments to assess the effect that these restrictions are having. The Reserve Bank expects that market segments with a higher proportion of high-LVR borrowers and greater levels of housing market activity will see larger impacts from LVR restrictions, particularly where a smaller proportion of borrowers are eligible for Housing New Zealand’s Welcome Home Loan Scheme.
Despite the policy being announced six weeks prior to implementation, there is little evidence to suggest that a material degree of activity was brought forward before the policy took effect. Mortgage credit approvals were only a little stronger over that period (figure A1), as were housing market transaction volumes. In part, this may be due to banks tightening credit criteria in the weeks leading up to implementation, to control the pipeline of lending that would be drawn down after 1 October.
Figure A1: Weekly value of mortgage approvals
Source: RBNZ, REINZ
At this stage there is only limited information on how the market has responded in the period immediately following implementation. From early September, banks started to increase low equity premiums, and tightened the availability and terms of pre-approvals for high-LVR loans. Many banks also moved to two-tier mortgage pricing, paying higher interest rates for high- LVR loans. In addition to those changes, banks reported less willingness to waive low equity premiums or offer discounts to high-LVR customers. Banks have also tried to actively manage their outstanding pre-approvals, with some banks cancelling outstanding high-LVR preapprovals.
While the pipeline of pre-approved lending may slow the immediate impact, there are some initial signs that this tightening in lending standards is starting to affect the housing market. On a seasonally adjusted basis, housing market approvals were 2.2 percent lower in October than September. Anecdotal reports from real estate agents and mortgage brokers also suggest that there was a material drop in buyer interest and transaction volumes. For example, the October BNZ REINZ survey of real estate agents, which was conducted about a week after LVR restrictions came into effect, reported declining housing market activity. Respondents reported fewer people visiting open homes and a reduction in auction clearance rates. First home buyer interest was reported as being substantially lower, while investor activity was less positive than it had been previously (figure A2).
Figure A2: Real estate agents’ perceptions of house buyer demand (net percentage reporting increase)
Source: BNZ REINZ residential survey.
So far, these market responses are broadly as expected. However, there is likely to be a degree of market volatility over the first few months that LVR restrictions are in place, as market participants adapt to the new environment. It will not be until property market activity settles down in a few months’ time that a clear view of the impact of the restrictions will emerge. The Reserve Bank will continue to monitor market developments closely to gauge the effects of the policy, including unintended consequences or for signs of regulatory ‘leakage' (see box C).
The Reserve Bank does not expect LVR restrictions to materially inhibit new construction, as house prices remain high enough for construction to be profitable once developments are approved. Furthermore, many home buyers (particularly those buying newly built homes) are not high-LVR borrowers, so buyer demand for new construction should continue. Nevertheless, the Reserve Bank is gathering further data on the lending market for newly built homes as part of assessing the impact of LVR restrictions.
1 See Bloor, C and C McDonald (2013) “Estimating the impacts of restrictions on high-LVR lending”, Reserve Bank of New Zealand Analytical Note 13/05, October