The Reserve Bank of NZ has taken its foot off the throat of the country’s home mortgage sector with the news that it will ease some prudential controls from January 1 next year.
The news will be welcomed by the big four Australian banks which dominate the Kiwi housing market.
The big four annual results showed that NZ was a well-performed market for them in 2017-18, with all four earning net profits of more than $NZ1 billion and close to $NZ2 billion for ANZ.
But there was also bad news for the banks from the RBNZ yesterday, including the big four, with a warning that the banks will probably have to lift capital reserves from next year onwards.
That will be at a time when the big four are finishing their current round of recapitalisation moves in Australia.
The RBNZ will issue a report on the issue next month.
The easing on mortgage restrictions was revealed in the latest financial stability review by the RBNZ.
It is a small easing and RBNZ Governor, Adrian Orr made it clear the bulk of the restrictions will remain in place for some time yet.
“Both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending. In response, we are easing our loan-to-value ratio (LVR) restrictions on banks’ new mortgage loans.
“If banks’ lending standards are maintained we expect to further ease LVR restrictions over the next few years,” Governor Orr said in the statement.
The central bank said from the start of next year that it would increase the cap on banks from 10% to 15% for new mortgage lending to owner-occupiers.
Currently, no more than 10% of loans can go to owner-occupiers with a deposit of less than 20%.
It will also ease the restrictions for investors.
At the moment only 5% of lending is for investors who have a deposit of less than 40%. From January 1 that will alter slightly to allow those with deposits of less than 35% for no more than 5% of investor lending.
Mr. Orr said loan to value ratios had been in place since 2013 to address financial stability risks arising from rapid house price inflation and increasing household debt.
“These policies have helped improve banking system resilience by substantially reducing the share of high-LVR loans.” He said that in the past six months pressures on the housing market eased due to further tightening of the LVRs, a firming of bank lending and an increase in mortgage rates.
“Housing market policies announced by the Government are also expected to have a dampening effect on the housing market,” he said in a statement.
The bank warned that elsewhere in the economy, debt in the dairy sector remains a concern (and for the big four banks and the RBA).
“Debt levels also remain high in the agriculture sector, particularly for dairy farms, implying ongoing financial vulnerability. Balance sheets need to be further strengthened. In the medium-term, an industry response to a variety of climate change-related challenges appears likely, requiring investment.
“While domestic risks have eased, the global financial vulnerability has risen. Significant build-ups in debt and asset prices, and ongoing geopolitical tensions, overhang financial markets.
“This vulnerability is highlighted by the current elevated price volatility in equity and debt markets. New Zealand’s exposure to these global risks has reduced somewhat, as New Zealand banks have become less reliant on short-term, and foreign, funding.
“The domestic banking system remains sound at present. We are using this period of relative calm to reassess whether the banking system has sufficient capital to weather future extreme shocks.
“Our preliminary view is that higher capital requirements are necessary so that the banking system can be sufficiently resilient whilst remaining efficient.
“We will release a final consultation paper on bank capital requirements in December.
“The banking system remains profitable, reflecting banks’ low operating costs and strong asset performance. While positive overall, banks’ low costs have been partly achieved through underinvestment in core IT infrastructure and risk management systems in New Zealand.
“This was highlighted in our review of the bank’s conduct and culture with the Financial Markets Authority. We will be jointly reviewing banks’ responses to our review in March 2019, and following up as required, Mr. Orr said in yesterday’s statement.
