RBNZ keeps LVR handbrake on

Despite speculation that its 'speed limit' on high LVR lending could be eased before Christmas, the Reserve Bank of New Zealand surprised many in political and banking circles on Wednesday by saying the macro-prudential tool would remain in place because of the risk of a resurgence of house price inflation.

At the release of its half yearly Financial Stability Report, the central bank said the limits on high Loan to Value ratio loans imposed on banks in October 2013 would not be eased or lifted until "sustained moderation in house price inflation is achieved, and when there is a little risk of a resurgence in housing market activity."

The bank said the tool had been successful in helping to almost halve the national rate of annual house price inflation to 5 per cent over the last year, but it wanted to see if a surge in net migration to record levels fired up the housing market again. Auckland house price inflation fell to 8.5 per cent from 17 per cent over the last year.

Reserve Bank governor Graeme Wheeler later told Parliament's Finance and Expenditure Select Committee that, if the lending restrictions had not been put in place, parts of the New Zealand property market would have been in "bubble territory."

Referring to Auckland's house price inflation, Wheeler said: "I don't think it is a bubble at present, at 8.5 per cent. I think we ran the real risk of a serious bubble had we not introduced these measures back in October last year. At that point house price inflation was running at 17 per cent in Auckland. I think it would have got well above 20 [per cent]."

"There remains a risk of resurgence in house price inflation, especially with the strong immigration flows, and consequently we don't believe it is the appropriate time to ease LVR restrictions."

Reaffirming that the LVR restrictions were intended to be temporary, Wheeler nevertheless pointed out that in the 25 other countries where some form of LVR restrictions had been introduced "they tend to keep them on and they become a permanent feature."

"We want to remove these LVRs, or phase them out," he said. "It's probably more likely we would phase them out rather than remove them in one hit, but we would like to be in a position to start that process. But we really don't want that process if there is a risk that house price inflation just starts increasing rapidly again."

The bank defended the restrictions against accusations from Opposition MPs they had benefited property investors but "shut out" first-home buyers.

RBNZ Deputy Governor Grant Spencer said the restrictions would benefit "first-home buyers in the future looking to buy a house, the house would be less expensive than it would otherwise be. Also some investors may have less capital gain than they would have otherwise without the LVRs."

But Wheeler conceded that it was a "fair comment" to say first-home buyers hadn't done as well as property investors from LVRs as the share of house sales to property investors had increased, while the share of first-home buyers was down from 19 per cent to 17 per cent.