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The Reserve Bank of New Zealand- Te Pūtea Matua is seeking views on its plan to reinstate loan-to-value ratio (LVR) restrictions on high-risk lending with effect from 1 March 2021.
LVR restrictions are used to reduce the risks to financial stability caused by higher-risk lending. The restrictions were removed in April to best ensure credit could flow and avoid an adverse impact on the mortgage deferral scheme implemented in response to the COVID-19 pandemic, Reserve Bank Deputy Governor and General Manager of Financial Stability Geoff Bascand says.
“LVR restrictions were first introduced by the Reserve Bank in 2013 and have been adjusted several times since then. When LVR restrictions were removed in April, we said they would remain off for a period of at least 12 months to help support the economy. However, since then the economy has performed better than expected, and the housing market has proved resilient.
“In addition, lending at higher LVRs has risen, particularly for investors, and there are signs that this trend is accelerating.”
The Reserve Bank is concerned that increases in highly-leveraged borrowing, if continued, could lead to emerging risks to financial stability.
LVR restrictions set a ceiling on the percentage of new mortgage lending that banks can offer at high LVRs. We are proposing to reinstate the LVR restrictions at the same level as prior to the onset of COVID-19, where a maximum of 20% of new lending is allowed at LVRs above 80% for owner-occupiers, and 5% of new lending at LVRs above 70% for investors.
The Reserve Bank’s objective when deploying macro-prudential policy instruments such as LVR restrictions is to promote financial stability by building the resilience of the financial system. By placing limits on high-risk lending, LVR restrictions help make household and bank balance sheets more resilient to a correction in property values if it occurs.
We welcome feedback on this proposal and will be accepting submissions until 22 January 2021. The Reserve Bank’s decision will be issued in February 2021, and would take effect from 1 March 2021, Mr Bascand says.
- Consultation paper: Reserve Bank proposes reinstating LVR restrictions
- Further regulatory steps to promote cashflow confidence and stability – November 2020
- Reserve Bank removes LVR restrictions – April 2020
- On 24 November 2020 the Reserve Bank received a letter from the Minister of Finance seeking our views on ways we can work together to address the Minister’s concerns regarding rising house prices.
- The decision to consult on reinstating LVR restrictions predates this letter.
- The Reserve Bank is formulating advice for the Minister, and will respond with considered feedback later this month.