Banks will have to be careful if the Reserve Bank removes restrictions on their high loan-to-value ratio (LVR) residential mortgage lending, says new BNZ CEO Anthony Healy, or the regulator may quickly reintroduce them.
Speaking to interest.co.nz in a Double Shot interview Healy, who succeeded the National Australia Bank bound Andrew Thorburn as BNZ CEO and managing director on May 12, said the Reserve Bank would be able to reimplement the restrictions quickly.
Earlier this month Deputy Governor Grant Spencer said the Reserve Bank could begin removing the LVR restrictions late this year. Spencer said the restrictions are meeting their objective of helping restrain demand for housing while supply gradually catches up, mitigating the systemic risk of a housing market downturn, and helping make banks’ balance sheets more resilient to a housing market shock.
Asked how banks will react if the restrictions - which the Reserve Bank says are temporary - are removed, Healy said they would need to be careful.
"Because if the banks suddenly went long again on high LVR lending, and you saw house price inflation pick up, then the Reserve Bank would simply reimplement the tool. Because it's a macro-economic tool they can implement it anytime they like," said Healy.
"The Reserve Bank has clearly seen some signs of heat coming out of house prices so they are prepared to look at removing that tool over time. But the fundamental issue for house prices is not mortgages above 80%, it's demand and supply. So how you improve the Resource Management Act, consenting processes, the way that the National government is now working with Auckland (Council) to really look at those things, to free up supply, will be what will have the biggest, sustainable long-term impact on house prices. Not above 80% LVR (lending)," Healy said.
When it outlined the LVR restrictions policy prior to actually implementing it, the Reserve Bank said the policy could be introduced with as little as two weeks notice for banks.
The Reserve Bank introduced restrictions on banks' high LVR residential mortgages from October 1 last year. This means banks must restrict lending at LVRs above 80% (where borrowers don't have a deposit or equity of at least 20%) to no more than 10% of total new mortgage lending. This 10% limit excludes high LVR loans made under Housing New Zealand’s Welcome Home Loans scheme, the refinancing of existing high-LVR loans, bridging finance or the transfer of existing high-LVR loans between properties, and new residential construction loans.
Reserve Bank figures for the first six months of the LVR restrictions show banks' high-LVR commitments fell to just 5.6% of total commitments, including exemptions, and around 6.8% before exemptions versus 25.1% as recently as last September.
Not keen on UK move of limiting lending to 4.5 times salary
Meanwhile Healy said he didn't want to see New Zealand follow the path Britain's taking to tackle similar issues LVR restrictions were introduced here to combat. Bank of England Governor Mark Carney has said capping the size of mortgage ratios to salaries is one measure being considered to control Britain's housing market. Carney has raised the prospect of people being stopped from taking out mortgages more than four and a half times times the size of their salary.
Lloyds Banking Group, Britain's biggest mortgage lender which is 25% government owned, has promptly announced it will restrict mortgages to a maximum of four times a borrower's annual earnings when it is lending more than £500,000 on a property. And other British banks are expected to follow suit.
"I think you have got to be careful when you start imposing lots of micro regulatory tools into a banking system," Healy said. "Because one of the things that is a real strength of our banking system is the core risk management practices at the banks, their innovation, the way that they continue to invest in the sector and bring new products to our customers."
"So the more you regulate their activities the less innovation you get over time, and the less attractive that sector will be for capital. And therefore you could risk starving that sector over time," Healy said.
"I'm not sure that picking an arbitrary number of four or four and a half times salary and saying 'that's the highest you can lend to' is; A) a call that a government should make, or B) the right number. I think it's a bit arbitrary."
"Our models are much more sophisticated than that. We look at house prices obviously, we look at leverage, we look at income levels. But also what people spend, what their other income sources are, what their likely increases in salary (are) over time. So I think you have got to be careful when you over regulate this stuff," said Healy.
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