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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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Westpac predicting rates to rise faster than forecast

In its recently released quarterly economic overview report, Stephens writes that Westpac’s prediction is for 90-day interest rates to rise much faster than either the Reserve Bank or the market expects.

It picks the first move in interest rates to happen in June 2013, when it says the OCR will still be at 2.50%.

By 2014, Westpac expects 90-day rates to be 4%. By comparison, the RBNZ tips them to have barely moved at 2.75% and the swaps market implied pricing puts them even lower, at just over 2.50%.
By 2015, Westpac expects rates to be over 5%.

Stephens’ report said that the Christchurch rebuild would make it hard for New Zealand to avoid substantial inflation.

“The inflation figures suggest that central co-ordination of small to moderate repairs – the bulk of the activity to date – has been effective in limiting construction cost inflation. This is unlikely to remain the case as major repairs and rebuilds take over as the main form of activity.”

He pointed to the fact that new housing in the Canterbury region has already risen roughly 10% over the past year.

Stephens said he expected home loan rates to follow the same trajectory as 90-day rates. They might stay on hold for another year or so but then would have to rise.

“Floating rates may not rise quite as rapidly as 90-day rates because at the moment banks have to pay a higher margin to procure funds from overseas. That pressure might come off.”
But he said it was unrealistic to expect the current historic lows to continue past 2013.

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