RBNZ models impact of LVR cap

The Reserve Bank of New Zealand has estimated its 'speed limit' on high Loan to Value Ratio lending could sharply reduce mortgage lending growth and carve as much as four percentage points off annual house price inflation in its first year.

However, it estimated the limit was unlikely to hit bank profits much and may actually reduce their losses from bad debts if a housing bubble burst.

The bank's regulatory impact statement on the speed limit announced on Tuesday said the Reserve Bank's modelling suggested the limit could reduce credit growth by 1-3 percentage points in the first year.

Mortgage lending grew 5.4 per cent or NZ$9.3 billion in the year to June, suggesting a fall in the growth rate to 2.4 per cent would have seen mortgage growth NZ$5.1 billion lower if the speed limit had been applied over the last year.

"This reduction is likely to come about through a combination of slower housing market turnover, reduced house prices and higher average deposits for house purchases," the bank said.

The bank said its modelling also suggested that house price inflation could be one to four percentage points lower over the first year of a policy where the mortgages with LVRs over 80 per cent were limited to 10 per cent of new lending flows. House price inflation was 16 per cent and 10 per cent respectively in Auckland and Christchurch over the last year.

"This reduction is expected to arise from reduced competition for houses, a direct lowering of the price that some purchasers are able to pay, and reduced house price expectations as a result of the restriction," the bank said.

The bank said its analysis, based on internal stress testing models, suggested the speed limit would reduce losses on mortgage lending by 10 to 15 per cent if they were in place two years prior to a severe housing market downturn.

The Reserve Bank said the speed limit would also "result in lost profit opportunities for the banks, as housing credit growth diminishes."

"However, as higher LVR lending tends to have lower return-on-equity, due to higher capital requirements and larger loan losses, the effect on profits is not expected to be significant," the bank said.

"Reduced high-LVR  lending flows would also likely be offset by an increase in low-LVR lending, as reduced competition in the housing market would encourage buyers with larger deposits into the market."

Elsewhere, the New Zealand Bankers Association warned the speed limit would hit first home buyers trying to get on the housing ladder, home owners trying to fund renovations and small business owners who wanted to borrow against their houses to invest in their businesses.

"People should be aware they may be declined loans because of the new restrictions imposed by the Reserve Bank," said NZBA CEO Kirk Hope, adding that banks would comply with the new limit.

Kiwibank said it would prioritise first home buyers over rental property investors in response to the speed limit.

Economists have previously said the speed limit was unlikely to dramatically slow house price inflation, but have said it could significantly reduce lending growth.

Bankers have also said they were likely to focus on growing the sub-80 per cent LVR market, discounting interest rates to boost growth, while re-imposing low equity interest rate premiums to mortgages with LVRs over 80 per cent.