RBNZ softens new LVR rules

The Reserve Bank of New Zealand has slightly softened its proposals to restrict low-deposit mortgages for Auckland rental property investors and delayed the introduction of the new rules by one month to give banks more time to adjust.

The bank regulator published its final position on its tighter loan to valuation ratio rules for Auckland property investors on Friday, including the announcement of a 1 November 2015 start rather than initial plans for an October 1 start.

The Reserve Bank announced in May that Auckland rental property investors would generally not be able to borrow more than 70 per cent of the value of a property. It's initial proposal was for a two per cent "speed limit", which meant no more than two per cent of new loans would be above the 70 per cent limit.

The Reserve Bank was concerned that Auckland's housing market was over-valued and a substantial correction could endanger financial stability, given most bank lending in New Zealand is against housing.

The central bank, which is both the regulator of banks and insurers and operates monetary policy, announced on Friday the two per cent limit had been increased to five per cent after consultation with banks.

The bank retained its existing 80 per cent LVR limit for owner-occupiers in Auckland and did not change its plan announced in May to loosen the speed limit for all property buyers outside of Auckland from ten per cent to 15 per cent.

The bank also introduced an exemption for high LVR lending above 80 per cent for repairs to leaky buildings.

Submissions on the policy contested the Reserve Bank's view that Auckland's property market could slump or that the banks could not handle any resulting losses. Some also argued against the central bank's view that rental property loans were riskier than those to owner-occupiers.

"Respondents argued that tighter New Zealand credit/origination policies, together with capital buffers (including higher capital that will be required following the establishment of a new asset class for residential investment properties), make banks better equipped to deal with a housing downturn than is the case in other jurisdictions/episodes," the bank said in its summary of submissions.

"Some respondents argued that historical New Zealand housing downturns have tended to be shallow and short-lived," it said. "Others noted that residential investment loan portfolios have tended to have a similar or better performance than that of owner occupiers (particularly if the investor's own house was part of the collateral package)."

The Reserve Bank also said banks noted their own resilience during stress tests conducted by the Reserve Bank in 2014. Those tests found a rise in unemployment to over 13 per cent and a fall in Auckland house prices of more than 40 per cent reduced bank capital levels to just under eight per cent from over 11 per cent, but remained well above regulatory minimums of 4.5 per cent.

"Respondents also noted that sustained house price inflation since the test has tended to create larger equity buffers for the stock of housing loans," the bank said.

The Reserve Bank said it agreed high net migration and housing shortages in Auckland had underpinned prices there, "but the Bank remains of the view that these factors could change in the future and make high LVR lending at the current level of Auckland house prices relatively risky."

It also agreed there was little New Zealand evidence that investors were riskier than owner-occupiers, "but consider this to be a natural consequence of the housing market having had only mild downturns since the early 1990s."

"The absence of a severe housing market downturn in the last 20 years is not evidence that one could not occur," the bank said, adding house price to income ratios were at unprecedented levels in Auckland.

Reserve Bank Deputy Governor Grant Spencer would expand on the bank's view on the property market in a speech later on Monday, the bank said.