Macro-prudential moves may not slow boom

Bank economists are sceptical the Reserve Bank of New Zealand's looming 'speed limits' on low deposit mortgages will do much to slow house price inflation that is currently running at double digit rates in Auckland and Christchurch.

The bank announced on Tuesday an initial six month window for banks to slow down their high loan to value ratio lending growth when the policy green light is finally given. Most economists expect the policy to be formally started between the Reserve Bank's September 12 Monetary Policy Statement and its November 13 half-yearly Financial Stability Report.

"Submissions from the banks emphasised the role the investor community, who tend to have lower LVRs, is having in driving housing turnover," JP Morgan Economist Ben Jarman said.  "This is particularly so for foreign investors, whose funding flows do not touch the domestic banking system," he said.

The bank is expected to limit the growth of mortgages with an LVR of over 80 per cent to around 12 per cent of new lending.  After the initial six month window, the calculation would be based on an average rate over three months, given many banks still have pre-approvals out in the market that last for six months.

The Reserve Bank has said high LVR lending made up 30 per cent of the mortgage lending growth in the last year of around NZ$9.3 billion. Total mortgage lending at the end of June was NZ$183.4 billion. The bank has not estimated the scale of any slowdown after the speed limits, but at previous rates of growth it could reduce lending by more than NZ$2 billion a year.

Banks have already begun rationing their high LVR loans by re-imposing low equity premiums adopted from 2008 to 2010 and by rejecting lower quality applications. Mortgage brokers reported the slowdown began in June shortly after the Reserve Bank agreed its 'toolkit' of so-called macro-prudential tools with the Government. Annualised mortgage approval growth slumped to near zero by the first week of August from nearly 18 per cent in the first week of May.

Economists said banks may try to work around the limits and emphasise lending growth in the sub 80 per cent  LVR category of loans to blunt the impact of the speed limit on lending growth. However, the bank regulator reiterated on Tuesday it expected banks, who require Reserve Bank registration, to comply with the spirit and the letter of the new rules.

Economists said low interest rates and housing supply shortages in Auckland and Christchurch would continue to drive house prices up in the long run.

"We expect the introduction of a speed limit on high-LVR lending will only have a modest impact on house prices, and we will continue to see continued housing market pressures over the coming year," ASB Economist Christina Leung said.

Westpac Economist Michael Gordon said the speed limits would lead to a bi-furcation of mortgage pricing with cheaper mortgages under the 80% threshold and bigger premiums above 80 per cent, which may encourage more borrowing in the lower category.

"So we suspect that, over time, house prices would be bid up to much the same levels as they would in the absence of LVR restrictions - perhaps at a slower pace, with fewer competing bidders, but ultimately reaching a similar end-point," Gordon said, noting however there could be a short term 'sticker shock' of lower lending growth and housing sales in the three to six months after the speed limit is introduced.

"Any such short-term impact wouldn't change our overarching views on the housing market, nor should it be taken as a sign that LVR limits can 'fix' the housing cycle," Gordon said.