IMF suggests mortgage lending restrictions could be eased

Should LVR restrictions be loosened? Photo / Fiona Goodall

The International Monetary Fund (IMF) suggests the Reserve Bank of New Zealand (RBNZ) considers relaxing bank mortgage lending restrictions as the housing market cools.

The organisation, in its latest report on New Zealand, said loan-to-value ratio (LVR) restrictions have been "effective in making lending for housing more cautious".

But with a moderation in house prices widely expected, the IMF said macroprudential policy "should be adjusted commensurate with the evolution of financial stability risks".

"Restrictions could be relaxed in case of a stronger-than-expected downturn in the housing market," the IMF said.

It noted it's difficult to estimate how long the trend of falling sales volumes and mortgaging lending will continue for, and how intense these drops will be.

New mortgage lending fell 31 per cent in March, compared to March 2021, according to the RBNZ. While this was a big fall, new mortgage lending for the month was still well above 2020 and 2019 levels.

Meanwhile, the country's median house price fell to $875,000 in April - down 5 per cent from a peak of $920,143 in November, but still up 9 per cent from April 2021, according to the Real Estate Institute of New Zealand.

"Financial stability risks from a sharp downturn in the housing market are limited given high bank capitalisation, but pockets of vulnerability, particularly among recent borrowers, may exist," the IMF said.

"More broadly, in case of a sharp downturn, potentially reinforced by a faster rise in interest rates, there could be a significant impact on consumption through wealth and confidence effects."

LVR restrictions are currently tight by historic standards.

They require at least 90 per cent of a bank's new mortgage lending to owner-occupiers to go to borrowers with deposits of at least 20 per cent, and at least 95 per cent of a bank's new mortgage lending to investors to go to borrowers with deposits of at least 40 per cent.

The RBNZ tightened LVR restrictions a couple of times last year, after a period of very high mortgage lending, which coincided with the RBNZ completely removing restrictions in response to Covid-19.

This reined in higher-risk, or "high-LVR" lending.

RBNZ deputy governor Christian Hawkesby, in a speech last month, said LVR restrictions were a "permanent device", and would remain in place, although perhaps at a different level to the status quo, even if the RBNZ introduces new debt serviceability rules.

The RBNZ is working to have a framework for debt-to-income restrictions in place this year, so restrictions can be introduced by mid-2023 if required.

Hawkesby said the RBNZ should aspire to publish projections of its macroprudential settings (LVR and debt-to-income restrictions), like it publishes projections for where it sees the Official Cash Rate going.