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Financial Stability Report: RBNZ announces new changes to mortgage lending

The Reserve Bank of New Zealand has released it’s 6 monthly Financial Stability Report.

Previous Financial Stability Report

Almost exactly one year ago, on the 29th November 2017, the RBNZ announced an easing of the lending restrictions on banks.  From the 1st January 2018, banks “speed limit” on low deposit lending would shift to 15% of their funds.  This had previously been sitting at 10%.  The change enabled a lot more first home buyers to apply, even with low deposits.

At the same time, investors would be able to borrow 65% on existing investment properties, up from 60%.

It’s follow-up Financial Stability Report in May 2018 was released which much less fanfare.  No major changes were implemented.  However the Reserve Bank stated that housing indebtedness is high.  And it did mention that the financial system was sound and efficient.  The term that everyone was talking about for this report was Debt-to-Income ratio.

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The Latest Financial Stability Report

The Reserve Bank looks to be still slowly easing the restrictions that it placed a few years ago on the property market.  The key changes announced today (coming into effect from 1st Jan 2019) were:

  • Owner-occupier 'speed limit' shifts so that 20% of loans can be for 80+% LVR.
  • Investor restriction sees LVR limit up from 70%
  • Investor ‘speed limit’ remains the same on higher (>70%) LVR loans.

It was thought of as a coin-toss whether the Reserve Bank would make any changes today.  Particularly to the LVR restrictions that are placed on the main banks at the moment.

These restrictions have been forefront in slowing the Auckland market although the inevitable problem of 30% capital gains per year also had a hand in it.  It is worth remembering that any pro-market changes can also be offset by other policy changes that are coming in or already in place.  The banks are required to adhere (rightly) to responsible lending practices.  This means buyers find their income purchasing less of a house than previously possible (Income Hurdle).

Additionally, property buyers also now face the bright-line test. This means they aren't able to trade properties as efficiently (or "tax-avoidingly") as they previously could.

Before you panic, we don't think you should look on these additional policies as negatives.  In the oldie days (pre-2008), the RBNZ typically only had one lever to pull to control the economy.  Interest rates.  Now, with so many levers - capital gains tax, lending restrictions, income servicing hurdles - interest rates aren't the first thing to move and that's a good thing for responsible first home buyers.

Summary of Announcements

  • Owner-occupier 'speed limit' shifts so that 20% of loans can be for 80+% LVR
  • Investor restriction sees LVR limit up from 70%
  • Investor ‘speed limit’ remains the same on higher (>70%) LVR loans
  • Changes in place from 1st January 2019

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