RBNZ Tightens Mortgage Rule For Owner-Occupiers; Sees Short-Term Price Impact

By Sophia Rodrigues

(Sydney, September 23, 2021)—The Reserve Bank of New Zealand is going ahead with its proposal to tighten mortgage rule for owner-occupiers but delayed the implementation by a month to account for disruptions caused to customers and banks from recent heightened lockdowns.

In a statement Thursday, the RBNZ said that from November 1, banks can do no more than 10% of new loans to owner-occupiers at loan-to-value ratio above 80%. This was option A of the two options RBNZ had proposed and was its preferred one. The other option was to retain the current 20% speed limit but reduce the LVR to 75% from 80%.

With this restriction, New Zealand’s LVR settings are at the tightest levels previously seen in the October 2016 to December 2017 period.

The tighter mortgage restrictions for owner-occupiers is a result of RBNZ assessment that house prices are above their sustainable levels, and hence the risks of a housing market correction continue to rise. The RBNZ noted that a rise in higher risk borrowing from owner-occupiers with a significant increase in borrowing at high LVR and high debt-to-income (DTI) ratios.

The RBNZ expects modest, short-term impact on house prices from the recent restrictions, and a reduction in consumption and residential investments if that happens.

It judged that any short-term costs would be outweighed by the longer-term benefit if this restriction is effective in reducing the magnitude of potential house price correction which would support consumption in a downturn, and thereby economic growth and employment.

The RBNZ said it will continue to monitor indicators of mortgage and housing-related risks to financial stability and may adjust the calibration of macroprudential restrictions in the future, as and when necessary to manage these risks.

The RBNZ will monitor the effect of the restrictions by assessing multiple variables including the flow of residential mortgage lending by banks, asset price growth, changes to aggregate household indebtedness, the stock of high-LVR lending and DTI ratios.

The RBNZ will also continue to monitor for signs of any significant market distortions, such as a material and growing share of mortgage credit being financed by non-bank institutions that are not subject to the policy.

The RBNZ will consult on debt restrictions in Q4 2021 to have another tool in its toolbox for managing financial stability risks related to the housing market.

--Contact: Sophia@centralbankintel.com