Invention and intervention
The Reserve Bank headed into the unknown last week, intervening in the housing market with its loan-to-value ratio (LVR) restrictions. As to whether this newly-minted tool slows the runaway housing market and to what extent, no-one including the Reserve Bank really knows. In a nutshell, our view is that the restrictions will slow house price growth for a while, before investors return
to the market and prices rise once again. Meanwhile, the economic upswing continues and inflation pressures build.
From 1 October, the Reserve Bank has required banks to restrict home loans that exceed 80% of the value of the house to no more than 10% of new lending (though with some exemptions, the share is expected to be closer to 15% in practice).
Recent estimates have shown that high-LVR loans make up about 30% of new lending. Halving this ratio to 15% should produce a ‘sticker shock’ effect and lead to a sharp, but temporary, drop-off in house sales and household credit growth in late 2013. However, beyond this short-term effect, we think that the long-term effect on the housing cycle will be limited.
Our view is that the RBNZ’s proposed ‘speed limit’ approach to high-LVR lending will lead to a bifurcation of mortgage rate pricing. High-LVR lending (i.e. above 80%) is likely to be rationed via price, in the form of either higher interest rates or a higher low-equity premium. But those borrowers who can muster a deposit of 20% or more may enjoy lower mortgage rates than otherwise, as lenders are likely to compete harder for this limited pool of customers.
Some buyers, including first-timers, are likely to be shut out of the market. As a result, home ownership rates will fall.
Read the full report: Market Research
Westpac