Yesterday’s minutes from the Reserve Bank of Australia’s July monetary policy meeting was all about the chances of a rate cut in a fortnight’s time – the line was that it is only a matter of time if the consumer inflation data next Wednesday is weak, according to most economists.
Across the Tasman it’s not only low inflation and a possible new rate cut next month, but also a growing sense of crisis in the way the Reserve Bank of NZ seems to be rushing to stiffen its macro-prudential controls on home lending.
In fact there’s a belief now that the significant changes to these policies in 2014 and 2015 (and especially last year) have not worked as house prices, especially including the main target, the key Auckland market) are not slowing.
As a result from September 1, the big four Australian banks face a significant limiting of their home lending in New Zealand if proposals from the country’s Reserve Bank become law.
For the banks it means that their most profitable area of business in NZ faces severe restrictions from September onwards, which is the end of their 2015-16 financial year.
This means the full impact of these changes and other ideas to control high debt to income ratio lending (subprime in US parlance) will fall in the 2016-17 financial year.
Coming on top of the slide in dairy lending as that sector struggles to survive weak prices, low demand and a global surplus, the big four banks face much tougher times ahead in their biggest international market.
It would not surprise if the Reserve Bank of Australia and APRA take a much closer look at their NZ home loan and dairy books in coming months.
In fact the proposed home lending changes represent a significant tightening of credit, particular for home investors in NZ.
The changes could be in place as early as the end of September.
At the same time, the lower than expected June quarter consumer price rise of 0.4% in NZ has raised the chances of the RBNZ cutting its official cash rate to a new low of 2% when it meets in early August.
The chances of a rate rise will become clearer tomorrow when a hastily arranged economic update from the central bank will be held, but economists reckon the bank is heading for an almost certain rate cut.
Part of the RBNZ’s proposed changes represent a reversal of a policy loosening in last year’s changes that saw property prices outside of the Auckland area accelerate as investors took advantage of the relaxation and plunged into these non-metro areas.
But the key change announced this week would see limits placed on banks making what are called high LVR loans (Loan to Valuation ratios) which are favoured by investors. In other words all buyers, especially investors, will have to put up a significant higher level of deposit.
In fact only 5% of lending to residential property investors will be to borrowers with less than a 40% deposit.
All up the restrictions will hit first home buyers hardest of all as they have the smallest deposits, and will now find it much harder to get finance.
Currently investors in Auckland require a 30% deposit, with no specific lending restrictions elsewhere. That is proposed to change from September. Given that NZ housing loans have a 90 day pre-approval period, and the new changes will be in place in six weeks, many prospective buyers will be disappointed. In fact the RBNZ has told all lenders to honour the new rules immediately.
In its 2015 macropolicy changes, the Reserve Bank loosened its restrictions on lending to borrowers outside Auckland with a deposit of less than 20%, allowing banks to increase the proportion of high LVR residential loans from 10% to 15%.
However yesterday’s statement signals that the limit for just 10% of all residential loans be to high loan to value borrowers (LVR of 80%, meaning a 20% deposit) will return across New Zealand after being eased last year.
Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.
“The banking system is heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength,” RBNZ Governor Graeme Wheeler said in a statement.
“The proposed restrictions recognise the higher risks associated with such lending,”
Mr Wheeler said: “The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy. Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority.
“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country. A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.
“LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages. This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand.
“We expect banks to observe the spirit of the new restrictions in the lead-up to the new policy taking effect.” Mr Wheeler said Consultation concludes on 10 August.
He also said that the RBNZ ”is progressing its work on potential limits to high debt-to-income ratio lending, which would be a potential complement to LVR restrictions.” They are already used in the UK, where most buyers cannot get a mortgage higher than 4.5 times their annual earnings.
