RBNZ imposes speed limit

After months of consultation with banks and political debate the Reserve Bank of New Zealand has imposed a 'speed limit' to halve the share of lending growth driven by low deposit mortgages and take pressure off house price inflation.

Governor Graeme Wheeler announced a speed limit would apply to the growth of mortgages with a Loan to Value Ratio of more than 80 per cent from October 1. This would restrict the growth of these mortgages to 10 per cent of the dollar value of new lending flows.

"The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy," Wheeler said in a speech at Otago University in Dunedin.

Wheeler said exemptions would apply to government-guaranteed Welcome Home Loans, bridging loans and the refinancing of existing high LVR loans, which was in line with earlier bank proposals. He said after the exemptions were taken into account the 10 per cent speed limit would effectively limit high LVR loans to about 15 per cent of new mortgage lending.

This would halve the 30 per cent share of growth that high LVR loans had grown to over the last year.

The bank had previously indicated it could apply a speed limit as low as 12 per cent so the effective limit of 15 per cent is slightly less severe than expected. The bank's decision to apply the limit from October 1 was also more lenient than earlier indicated. It had initially proposed a two-week notice period.

The bank also confirmed banks with more than NZ$100 million a month in new lending would have an initial six month window for the measurement of the average flow of new mortgages before the speed limit reverted to a regular three month window.

Wheeler also fired a warning shot to any banks thinking of trying to get around the limit with new types of products or ownership structures. Some commentators have warned that banks could create separate second tier lenders or second mortgage products to circumvent the rules.

"We are concerned to ensure that specially designed lending products are not developed with the purpose of avoiding or undermining the LVR restrictions," he said.

"The Reserve Bank expects bank senior management and bank boards to respect the spirit and intent of the LVR restrictions and to closely monitor the level of high LVR lending."

Wheeler said the speed limit would be removed if there was evidence of a better balance in the housing market and the bank was confident any removal would not lead to a resurgence in the housing market. House prices have risen 16 per cent and 10 per cent respectively in Auckland and Christchurch over the last year.