On 1 October 2013 the Reserve Bank of New Zealand introduced measures to restrict the value of "high LVR" residential loans that New Zealand banks can make. LVR stands for Loan to Value Ratio and represents the ratio of the loan amount to the value of the mortgaged property which secures the loan. The NZ Reserve Bank has defined a high LVR as one where the loan amount is 80% or greater of the value of the security property.
Describing the restriction as a "speed limit" on new lending, the NZ Reserve Bank regulation restricts the dollar value of high LVR new residential mortgage lending to 10% of the total value of the new loans written. In other words, 90% of new loans written by banks in New Zealand must be supported by a deposit of 20% or more.
The reason for the restriction, according to the Reserve Bank, is to:
"...reduce the risk of a sharp housing downturn and the loss of equity that would result"
It appears that the strategy is working. In April this year the Reserve Bank released figures showing that since October 2013 house prices in New Zealand have fallen by about 2.5%.
The opposite trend is occurring in Australia. On 28 May 2014 the SMH reported that the proportion of new mortgages issued in the March quarter with an LVR above 80% rose from 34.2% to 34.8%. During that same quarter house prices in Australian capital cities (as measured by the Australian Bureau of Statistics) rose by 1.7% with Sydney leading the growth at 2.3%.
The Australian regulator appears to be taking note. In late May 2014 APRA issued its "Draft Prudential Practice Guide – APG 223 – Residential Mortgage Lending" for consultation. In the draft Guide APRA ominously warns that in times of rapid house price appreciation it may be appropriate for a bank to "strengthen its LVR constraints".
Click here for the link to the Draft Prudential Practice Guide.
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