RBNZ details new LVR plans

The Reserve Bank of New Zealand has spelled out its proposals to limit highly leveraged lending to rental property investors in Auckland, including allowing a small amount of mortgages with Loan to Value Ratios (LVRs) of over 70 per cent.

The RBNZ announced the broad outline of its policy on May 13 and indicated then it would restrict all rental property lending in Auckland with LVRs above 70 per cent. But its consultation paper published on Tuesday proposed allowing two per cent of new lending to Auckland rental property investors above the 70 per cent threshold.

It said applying a complete ban risked an accidental breach costing a bank its license.

"Under a zero limit, even a single loan to a residential property investor at an LVR of greater than 70 per cent would represent a breach of a bank's conditions of registration," the RBNZ said.

"Such a breach could occur if an administrative error inadvertently resulted in a loan being granted. Further issues could arise with loans that have been approved prior to the introduction of the proposed policy, but have not yet reached the commitment stage," it said.

The bank said more than half of all new mortgage lending in New Zealand was going into Auckland, which meant it was of systemic importance to the financial system if there was a sharp correction.

The RBNZ said it had run stress tests in 2014 in conjunction with APRA that found a significant downturn in Auckland house prices would reduce bank capital ratios to within one per cent of regulatory minimums. It later suggested such a downturn could include a price fall of 30 to 40 per cent.

It noted that since those tests were done Auckland house prices had risen a further 18 per cent.

"Further, the share of lending going to Auckland is increasing, and a greater share of this lending is going to investors," the RBNZ said.

"The Reserve Bank's assessment is that stress test results would be worse if the exercise was repeated now."

The RBNZ repeated its estimates that the policy would reduce house sales volumes in Auckland by eight per cent in the first year and reduce annual house price inflation by two to four percentage points. It also said it expected the policy would reduce the share of investor loans with an LVR of over 70 per cent from around a third currently to a quarter.

The consultation was open until July 13 and the RBNZ expects to publish a summary of submissions and its final policy ruling in August, with the rules taking effect from October 1.