28 Nov 2018

Lending restrictions for first home buyers, investors to be relaxed

6:06 pm on 28 November 2018

The growth in house prices and lending has slowed so the risks to banks have also lessened, the governor of the Reserve Bank says.

Sold sign outside a house in East Auckland

Photo: RNZ / Claire Eastham-Farrelly

Lending restrictions for first home buyers and investors are to be relaxed slightly from the start of next year.

In its six-monthly update on the health of the financial system, the Reserve Bank has said housing pressures on the banking system with growth in prices and credit slowing down.

"We are easing our loan-to-value ratio (LVR) restrictions on banks' new mortgage loans. If banks' lending standards are maintained we expect to further ease LVR restrictions over the next few years," RBNZ governor Adrian Orr said.

From the start of next year banks will be allowed to have up to 20 percent of their lending to first home buyers with less than a 20 percent deposit. Currently the limit is 15 percent of new loans.

The limit on lending to residential property investors has been held at 5 percent, but the required deposit has been eased to 30 percent from the current 35 percent.

The LVRs were imposed in 2013 to reduce the risk for banks as house prices surged by as much as 20 percent a year, and a large part of bank lending was going to borrowers with low finances.

At the time it was suggested they would only be temporary, but Mr Orr has made it clear he regards them as permanent, with only the level of restrictions changing.

"They are an instrument used in cyclical issues .. the level of the LVRs will change as the cycle evolves."

Little impact on housing market

The RBNZ has been reluctant to significantly loosen the LVRs because it might reignite the housing market.

But a senior property market analyst at research company Core Logic, Kelvin Davidson, said he doubted the latest relaxation will have much effect on the property market.

"It's got the potential to bring a few more borrowers in who were previously locked out, so you might see sales activity pick up a bit and have an impact on prices .. but the banks will be keen to stay pretty cautious."

He said the prospect that the banks will need to have more money put aside as capital and reserves after the RBNZ completes a review next year will also make them wary.

The Real Estate Institute said the easier limits should attract in first home buyers.

"The fact that banks have the opportunity to increase the percentage of new lending... means there is a chance for more first time buyers to have access to lending that they haven't previously had," Institute chief executive Bindi Norwell said.

In other parts of the Financial Stability Report, the RBNZ said the risk from an indebted dairy sector was also receding, and that in future local banks will have to put more effort into coping with the financial risks of climate change.

Mr Orr also warned that insurance companies will need to improve their financial resources, he said too many while solvent did not have enough of a buffer to be able to withstand a broader financial shock.

Farm debt a problem

On another matter, farm debt was a problem, according to the Financial Stability Report.

The Reserve Bank said debt was high but it was concentrated in the dairy sector mainly, because farms were so expensive to buy and the level of capitalisation required for machines was so great.

But even within the dairy sector, debt was concentrated in a few places.

"Just under 20 percent of dairy farmers hold about a third of the debt," said the bank's deputy governor Geoff Bascand.

"There is a hard core element to that which banks are trying to manage.

"Fewer of the loans are interest only, and more are going to a debt amortisation schedule, so we are making progress, but it is slow."

The bank said agriculture accounted for around 14 percent of banks' total lending, and two thirds of that went to the dairy sector.

It said most farms were expected to be profitable this season, but further falls in global dairy prices could put that under pressure.

El Niño could be an extra difficulty, as could Mycoplasma bovis, with compensation arrangements not expected to cover all costs in some cases.

The Reserve Bank said agriculture was already bearing the costs of tighter regulation, and would also face the consequences of climate change.

While it advised trading banks to diversify their lending portfolio, it noted this was already happening, with lending for horticulture rising 15 percent in the year to September, while lending to the dairy sector grew only slightly.