With house prices expected to fall through 2020, more borrowers could fall into low equity situations by the end of the year. Westpac predicts house prices could fall by 7% in the second half of 2020.
Borrowers with high LVR loans could put strain on banks' lending limits if prices fall significantly.
Banks are currently bound by speed limits for high LVR lending. Banks can provide up to 20% of their owner-occupier loans to those with a deposit of less than 20%. Lenders can allocate 5% of their book to borrowers with less than a 30% deposit.
Meanwhile, borrowers deferring payments on mortgages could also drop into low equity situations as interest accrues.
The Reserve Bank told TMM Online it would monitor the LVR situation closely.
An RBNZ spokesman said: "We are constantly monitoring banks’ compliance with the Reserve Bank’s loan-to-value ratio restrictions and will respond as appropriate to any potential breaches that are caused by the effects of the economic situation brought about by the Covid-19 crisis."
The spokesman pointed to the central bank's "routine" review of LVR speed limits, with the next assessment due in May. Some market commentators have called for speed limits to be relaxed in the wake of the global crisis.
"LVR restrictions are routinely reviewed ahead of the publication of the Reserve Bank’s Financial Stability Report, the next of which is due for publication on May 17," the RBNZ spokesman said.
Massey University's David Tripe believes the central bank will wait for more data on the severity of the crisis before deciding to change LVR limits.
"If I was in their position, I would be holding fire," Tripe said. "If house prices drop 5% after the lockdown, is that as much as they are going to fall? Or will it keep on going?"
Tripe says banks will face a growing challenge assessing loans as house prices fluctuate.
"If you're looking at approving a loan now, you don't know what the value of the property will be come May 1. If I was a bank I might be happy that LVR restrictions were in place, as it would reduce the temptation to make over-generous loans."
