LVR easing sooner than expected

The Reserve Bank’s decision to start relaxing the LVR restrictions early next year, which was announced in today’s Financial Stability Report, has taken economists by surprise.

In November’s Monetary Policy Statement, Reserve Bank Acting Governor Grant Spencer had signalled the bank would be laying out its plans on unwinding the LVRs in the FSR.

But most economists are surprised by the bank’s announcement this morning that it plans to begin relaxing the restrictions from January 1 - which is much sooner than expected.

ASB chief economist Nick Tuffley says uncertainty around the election’s impact on market activity and over when government tax/housing policies will take effect meant they expected the Reserve Bank would wait a little longer.

The shifts are modest but are likely to contribute to a stabilising in 2018 of the mild price falls seen in Auckland and Christchurch, he says.

“We would still expect price growth in other regions to flatten off... We don’t expect the eased restrictions to spark a return to strong house price growth.”

From here on in, further LVR easing will depend on the Reserve Bank being comfortable that financial stability risks will remain contained. 

But the FSR suggests the Reserve Bank is quite confident the housing market will not rebound, Tuffley says.

“The Reserve Bank will be mindful the Auckland and Wellington markets are still quite supply-constrained, while the quality of banks’ residential lending portfolios will also be a consideration.”

He adds that any future moves would follow the pattern of the first move, with incremental easing of the restrictions, with the next FSR in May 2018 the obvious moment for another announcement.

The Reserve Bank’s move also took Westpac by surprise as the banks’ economists had not expected easing in the LVRs until mid-2018.

Westpac senior economist Michael Gordon says the momentum in house prices has actually turned positive again in the last few months.

“We see a risk of a further near-term bounce, as buyers look to get in ahead of the foreign buyer restrictions and the extension of the bright-line capital gain test from two to five years.

“The easing of the LVR restrictions will provide further support for house prices at the margin.”

Westpac recently forecast a 2% fall in house prices over 2018, as a range of government policies aimed at cooling housing demand took effect, he says.

“The earlier than expected easing of the LVR limits muddies the waters somewhat, and we will have to lift that forecast a little.

“But we still think that the combined impact of government and Reserve Bank policies will be negative for house prices next year.”

See here for the details of how the Reserve Bank will be easing the LVR restrictions.

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