The portion of new mortgages (by value) issued to investors with deposits of less than 30 per cent (after exemptions under the rules) skyrocketed from 0.5 per cent in April 2020 to 38 per cent by October 2020, according to data just released by the RBNZ.
Meanwhile, the portion of new mortgages issued to owner-occupiers with deposits of less than 20 per cent jumped from 12 per cent to a peak of 20 per cent in July 2020.
When the RBNZ reinstated the restrictions in March 2021, these portions dropped right back.
Nonetheless, the combination of no LVRs, record-low interest rates, and constrained housing supply (among other factors) saw CoreLogic’s house price index rise by 49 per cent between the December 2019 and 2021 quarters.
The RBNZ, in an article published on Tuesday, detailed some of the lessons it learnt from this time.
The article’s authors, Chris McDonald and Shaun Markham, recognised while LVRs were loosened in little over a week, it took much longer to tighten them.
“It takes time to consult publicly when tightening, and banks also need time to adjust their pipeline for preapproved loans,” they said.
“Given this, in uncertain situations, there may be value in waiting before removing restrictions. Alternatively, more measured adjustments could be taken such as easing LVR restrictions rather than removing them altogether.”
McDonald and Markham said this would also help “if the decision turned out to be wrong in hindsight”.
“Our experience during 2020 and 2021 highlights this challenge.”
DTIs would complement LVRs
McDonald and Markham also made a case in support of DTIs, which would limit the amount banks could lend to those seeking large mortgages compared to their incomes.
They reiterated what RBNZ deputy governor Christian Hawkesby told the Herald a couple of weeks ago – that these restrictions wouldn’t need to be changed as frequently as LVRs, which would make them useful.
Indeed, they could be set at a certain level and act as a natural stabiliser – be more restrictive when interest rates are low, and people want to borrow more because they feel like they can afford it.
In January 2021, 27 per cent of banks’ new mortgage lending went to borrowers who took out mortgages worth more than seven times their annual incomes. In September this year, this portion sat at only 5 per cent.
McDonald and Markham noted that had the Government empowered the RBNZ to implement DTIs ahead of the Covid period, fewer borrowers might be struggling now that interest rates are higher.
Former finance minister Grant Robertson added DTIs to the RBNZ’s “macroprudential toolkit” in 2021.
The RBNZ has told banks to be ready for the implementation of these rules any time from April 2024.
McDonald and Markham recognised that because DTIs have already been added to the RBNZ’s toolkit, legally, it doesn’t need the Government’s permission to implement them.
However, the RBNZ has in the past sought agreement from the finance minister before implementing new rules.
Finance Minister Nicola Willis said, “The RBNZ is yet to engage with me on any plans it may have for the potential use of DTI restrictions. I’ll await advice before making any comment.”
The former National-led Government was unsupportive of DTIs.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
