The Reserve Bank's deputy governor and general manager for financial stability Geoff Bascand says consultation on its proposal to restrict the amount of lending banks can do above an LVR of 80% to 10% of all new loans will begin later this month with a view to introducing it from October 1.
The action follows the signing of an updated Memorandum of Understanding (MoU) on macro-prudential policy with the Minister of Finance.
“The updated MoU adds debt serviceability restrictions to the list of tools available which will enable us to be more targeted in our approach to tackling financial stability risks,” Bascand says.
“We are focussed on ensuring borrowers are resilient to a range of future economic and financial conditions. We are particularly concerned about those who have borrowed in the past 12 months at high LVRs and high DTIs."
Bascand says if house prices were to fall, some buyers could face the possibility of negative equity – which means the value of their property is below the outstanding balance on their mortgage.
“We’ve already made adjustments to Loan-to-Value Ratio restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending.”
He says to prevent the problem from getting worse, the RBNZ will be consulting on a proposal to further reduce the amount of high LVR lending to owner-occupiers.
“We also intend to consult in October on implementing Debt-to-Income (DTI) restrictions and/or interest rate floors in an effort to provide further comfort that borrowing is sustainable.
"Introducing DTIs will take longer, whereas the banking industry has informed us that interest rate floors could be implemented more quickly.
“Consultation will be focused on operational feasibility and possible calibration of these tools, including their impacts on investors and first home buyers,” Bascand says.
RBNZ governor Adrian Orr says house prices are above a sustainable level and the bank, in its role as guardian of the financial system, is trying to limit these risks for the long-term wellbeing of everyone - borrowers, lenders, and the general economy.
"We have spoken and written a lot about the many drivers of the current high house prices in New Zealand. We acknowledge that one of these reasons is the low interest rates due to our response to the Covid-19 economic shock.
"We had to significantly lower the Official Cash Rate to best meet our monetary policy mandate of maintaining low and stable inflation, and contributing to maximum sustainable employment."
Orr says the pandemic-induced global economic shock created risks of falling prices (deflation), rising unemployment, and unprecedented global financial stress.
"The worst of these outcomes has been headed off by successful health management, government-led wage and business funding support, and lower interest rates aimed to boost cash-flows and keep business afloat."
Orr says he expects banks operating in New Zealand to take heed of the RBNZ's signal to consult on the tightening of lending standards – both LVRs and debt servicing criteria.
"They must make their lending decisions with the best long-term interests of the borrower in mind."
For details about the proposal and consultation, click here.
