RBNZ retains mortgage lending caps

George Lekakis
The Reserve Bank of New Zealand says it will maintain so-called macro-prudential restrictions on Kiwi banks and other regulated entities amid concern that the prevailing low rate environment could potentially stoke a new cycle of risky lending activity.

The decision contrasts with recent moves by the Australian Prudential Regulation Authority to ease lending caps on large and small bank lenders in the Aussie mortgage market.

In a statement on Wednesday around its Financial Stability Review, RBNZ Governor Adrian Orr said loan to value ratio caps for residential loans would continue to operate because they had been successful in reducing "excessive household mortgage lending".

"But there remains the risk that prolonged low interest rates could lead to a resurgence in higher-risk lending," he said.

"As such, we have decided to leave the LVR restrictions at current levels at this point in time."

The RBNZ's "temporary" restrictions - introduced in 2013 - classifies investor loans as "high LVR" if they are more than 70 per cent of a property's value. Banks are required to limit such high LVR investor loans to no more than 5 per cent of total new investor lending.

Owner occupier loans are classified as high LVR if the loan amount accounts for more than 80 per cent of a property's value. Kiwi banks must ensure that such loans do not account for more than 20 per cent of new lending to owner occupiers.

Since the middle of 2018 APRA has gradually loosened limits on banks and credit unions after new home borrowers gravitated to unregulated lenders.

In December last year annual growth caps on interest-only lending to investors were removed after APRA chairman Wayne Byers said successfully "moderated" high risk lending activity.

In July, the Australian regulator removed a mandatory stress test that required banks to assess whether a loan applicant could afford to service a property debt under a hypothetical scenario in which interest rates rose to at least 7 per cent.

Under a new APRA standard banks have been given greater discretion to apply their own serviceability buffers to loan applicants.

The recent recovery in property prices in Sydney and Melbourne appears to have coincided with the relaxation of  APRA's restrictions.

Australia's mortgage lending restrictions resulted in a swathe of mutual lenders entering unfamiliar realms of credit risk last year when they tried to ramp up business lending to counter the impact of tapering home loan volumes.