LVR limits off the table (for now)
The Reserve Bank isn’t planning to introduce loan-to-value ratio (LVR) limits in the near future, despite raising concerns about the increasing number of high-LVR mortgages.
Thursday, November 8th 2012, 6:53AM
Limiting LVRs is one of four instruments the central bank has been considering adding to its regulatory “toolbox” to help cool off overheating credit markets and prevent rapid rises in house prices such as those seen between 2002 and 2007.
However, following the release of the central bank’s latest financial stability report, new Reserve Bank Governor Graeme Wheeler said that even if he could limit LVRs we wouldn’t do so at the moment.
Although several regulators overseas including in Canada and Israel have made such a move, Wheeler said there would have to be significant systemic risks for New Zealand to go down that path.
Wheeler made his comments despite the Reserve Bank’s report raising concerns about high levels of household debt and the increasing share of high-LVR loans in the mortgage market.
“Discussions with banks suggest that high loan-to-value ratios (LVR) loans are now beginning to form a significantly larger share of new mortgage lending than has been the case for most of the period since the financial crisis,” the report said,
“Residential mortgage lending conditions appear to have loosened with high loan-to value ratio (LVR) lending becoming more prevalent.
“If credit demand was to strengthen significantly, and banks were willing and able to accommodate that demand, indebtedness (relative to income) could resume an upward trend eroding households’ resilience to shocks.”
The report said and house prices remain over-valued on some metrics and banks will need to remain alert to the risks associated with a “marked acceleration” in credit growth to the household sector.
“At present, credit growth is still reasonably subdued, but the Reserve Bank remains alert to developments that might warrant macro-prudential intervention."
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The OCR ain't going anywhere
The new Reserve Bank governor, Graeme Wheeler, predicts that the official cash rate won't by going anywhere until 2014.
This is clear from the 90-day bank bill forecast graph in the December Monetary Policy Statement. It shows clearly how over the past year forecast increases kept getting pushed down each quarter.
A year ago the bank was predicting the 90-day bill rate would be up at 4.00% by March 2014. That forecast was wound back to 3.3% in March, 3.2% three months later and is now down at 2.8%.
The good news for borrowers is that, asssuming things pan out as forecast, then home loan rates aren't likely to be going up any time soon either.