First home buyers could get a break on tough deposit rules

The tough lending rules that set deposit levels for home buyers could be relaxed this week in response to a flattening property market, although economists warn the Reserve Bank will move cautiously and keep a close eye on debt.

The Reserve Bank has indicated that it has been reviewing the loan to value ratio (LVR) rules, which were introduced to try and cool the property market in 2015.

It has said it will release the conclusions from that review in its Financial Stability Report due this Wednesday.

After a couple of tweaks, including relaxing the investor rule at the start of this year, deposit requirements are currently set at 35 per cent for investors and 20 per cent for owner occupiers.

Banks are allowed to lend outside those limits for five per cent of their new investor loans and 15 per cent of their new owner occupiers.

The Reserve Bank could opt to tweak either the deposit limits themselves or the extent to which of banks can lend outside them.

Real Estate Institute chief executive Bindi Norwell said she would not be surprised to see them ease the deposit limits by five per cent and she was hopeful they would include first home buyers this time.

"They will have to be quite cautious and that's a good approach," she said. "Debt levels are still high."

But while there was a two-tier property market now with some regions still booming, Auckland had slowed a lot.

The Royal Commission in Australia was also putting pressure on the New Zealand banks' parent companies which was likely to keep credit conditions tight even if rules LVR rules were relaxed, she said.

"Even five per cent will help, particularly for the first home buyers," Norwell said. "If you think of a $560,000 median price for the country , that's $112,000 [for a 20 per cent deposit]. If they reduce it by five per cent its down to about $85,000. So that's about a $30,000 difference, a huge impact."

Economists say it's a matter of when not if the Reserve Bank will moves to relax rules.

ASB chief economist Nick Tuffley describes it as "a line ball call" but leans towards them leaving the rules unchanged until the middle of next year.

However the case could easily made either way, he says.

ANZ chief economist Sharon Zollner said she expected an incremental move but agreed it was a close call.

And even in Auckland - where it had been flat for 18 months - low interest rates meant you couldn't rule out the possibility of it sparking back to life, she said.

Independent economist Cameron Bagrie noted that the recent mortgage rate war could be a cause for caution but he still picked the Reserve Bank to ease.

"I think the Reserve Bank can have enough faith in the banks tightening their own credit criteria to relax the LVR's a little," he said. "So I'd be inclined to give it a tweak. I think that's the playbook here. You do it in small incremental shifts."

NZIER principal economist Christina Leung said that while there was probably room to relax the LVRs now she would prefer to see them hold off a bit longer.

"In terms of the path of least regret I would say waiting is a better option," she said.

The Reserve Bank's financial stability brief requires it to keep a close watch on New Zealand's debt levels which grew rapidly during the housing boom.

While the credit growth has flattened off in the past few years household debt remains high at 92 per cent of GDP.

The Loan to value ratio (LVR) rules*

Investors
Investors mortgages issued with less than a 35 per cent deposit are deemed high-LVR. These loans can make up no more than 5 per cent of a bank's total new lending.

Owner-occupiers
Owner occupiers mortgages issued with less than a 20 per cent deposit are deemed high-LVR loans. These loans make up no more than 15% of a bank's total new lending.

(*New builds are exempt)