Owner occupiers better protected now: RBNZ (+ Report)

New owner-occupier mortgage holders have become less vulnerable to a housing market bust, higher interest rates or income loss since the Reserve Bank introduced the LVRs.

That’s according to a new Reserve Bank study, which looks at mortgage vulnerability and deposit affordability before and after the introduction of the first two rounds of the LVRs.

Concerns about financial system resilience in the face of rapid house price growth and heightened competition for new mortgage lending led the Reserve Bank to institute the LVRs in, first, 2013 and then 2015.

Prior to their introduction, the average LVR for new mortgage holders came in at approximately 67%, according to the study.

But by mid-2016, the study finds the average LVR for new mortgage holders had declined sharply to about 55%.

“This suggests a substantial increase in average equity buffers driven by a widening gap between median mortgage debt and median house prices,” the study says.

“The increase in average equity buffers is not necessarily due to the LVR policy as rising property values would likely have increased the average equity of movers even if the policy was not in place.”

Over the same period, the share of mortgage lending extended to new mortgage holders with LVRs above 80% declined from 60% to 35%.

The study says this provides evidence for the resilience benefits of the LVR policy, as households with lower equity buffers have a more limited safety net against a variety of risks.

“In the event of a decline in income or an increase in interest rates, households with lower LVRs have higher flexibility to restructure or refinance their mortgages.”

Alongside the decline in new mortgage holders with high LVRs, the study finds there has been a decline in the share of households with high debt-to-income (DTI) ratios.

The average DTI for new borrowers also declined from 3.6 to 2.9 and the share of borrowers with a DTI above four declined from 37% to 24%, it says.


“These trends suggest that new borrowers now have more flexibility to restructure their debt and are likely more resilient to a hike in interest rates or a decline in income.

“The decline in the share of high-DTI borrowers may be related to the LVR policy as borrowers with high-LVRs also tend to have weak serviceability.

“For example, low income borrowers may have difficulty assembling a deposit through savings and are also more likely to have high DTIs.”

However, the study also finds that the average DTI is consistently higher in Auckland than in the rest of New Zealand, which reflects that Auckland house prices are higher relative to incomes.

“With the servicing burden of debt being higher, new buyers in Auckland appear to be more vulnerable to an increase in interest rates or a decline in income.”

Overall, there has been a general decline in risk, the study says.

That’s because should households with high DTIs and low LVRs default they have a high equity buffer which is less risky for banks, while households with high LVRs and low DTIs are better able to continue servicing their debt in time of stress.

Further, the share of high-risk borrowers who have a DTI above four and an LVR above 80% declined significantly after the policy, from 17% to 7%.

Not surprisingly, the study also finds that deposit affordability has declined, especially in Auckland.

“Although the LVR restrictions are likely to have required some households to save longer for a deposit than otherwise, it is difficult to disentangle this impact from other factors, such as rising house prices,” it says.

But it notes that, under the LVRs, banks can fund some high LVR borrowing and that the banks have disproportionately allocated that lending to first-home buyers.

“There is also evidence that first-home buyers have substituted to lower value housing and relied on parental guarantees.”


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