The Reserve Bank of New Zealand – Te Pūtea Matua is putting in place more stringent loan-to-value ratio (LVR) restrictions to reduce the risks to financial stability caused by high-risk mortgage lending. The LVR restrictions do not apply to new residential construction.
LVR restrictions were removed in April 2020 to ensure they didn’t interfere with COVID-19 policy responses aimed at promoting cash flow and confidence, Reserve Bank Deputy Governor and General Manager of Financial Stability Geoff Bascand says.
“Since then, in part due to the success of the health and economic policy responses, we have witnessed a rapid acceleration in the housing market, with new records being set for the national median price, and new mortgage lending continuing at a strong pace.
“We are now concerned about the risk a sharp correction in the housing market poses for financial stability. There is evidence of a speculative dynamic emerging with many buyers becoming highly leveraged.
“A growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service the debt. Highly leveraged property owners, in particular investors, are more prone to rapid ‘fire sales’ that potentially amplify any downturn.
“These financial stability risks exceed the situation at the time of the Bank’s December LVR consultation, resulting in more restrictive policy settings being decided on. As of 1 March the Reserve Bank will be reinstating LVR restrictions at the same level they were set at prior to the onset of COVID-19, with a further tightening of investors’ restrictions taking effect on 1 May. The two step process is necessitated by mortgage lenders’ operational capabilities.”
From 1 March 2021:
- LVR restrictions for owner-occupiers will be reinstated to a maximum of 20% of new lending at LVRs above 80%.
- LVR restrictions for investors will be reinstated to a maximum of 5% of new lending at LVRs above 70%.
From 1 May 2021:
- LVR restrictions for owner-occupiers will remain at a maximum of 20% of new lending at LVRs above 80%.
- LVR restrictions for investors will be further raised to a maximum of 5% of new lending at LVRs above 60%.
“We expect mortgage lenders to respect the 60/5 investor restrictions immediately with all new loan approvals, to ensure that their mortgage lending is consistent with our policy decision,” Mr Bascand says.
A public consultation on the proposal to reinstate LVR restrictions was carried out from 8 December 2020 to 22 January 2021. A full Summary of Submissions will be released alongside a Regulatory Impact Assessment (RIA) in due course.