UPDATE: RBNZ keeps LVR restrictions in place as housing risks remain
The Reserve Bank will retain restrictions on low-equity mortgage lending because governor Graeme Wheeler continues to see risks in the housing market, particularly given strong migration flows.
The loan-to-value ratio restrictions, limiting the amount private banks can lend on a house with a deposit of 20 percent or less, have helped cool a buoyant property market since they were imposed in October last year, and higher interest rates have added to the slowdown, the central bank said in its six-monthly financial stability report. The success in slowing house price inflation had some economists picking the winding back of the policy, though Wheeler today said risks still remained and it was prudent to keep the restrictions in place.
"There remains a risk of a resurgence in house price inflation, particularly in light of strong immigration flows," Wheeler said in a statement. "Consequently, we do not consider it appropriate to ease the LVR speed at this time."
The central bank has been surprised by the limited inflationary effect strong net migration flows have had on the economy, as increased numbers of new migrants and returning kiwis have largely been a different demographic to the typical house buyer, while an expanding labour force is keeping wages growth low.
Wheeler told reporters in Wellington the bank doesn't want house price inflation to get out of hand, and that prices are still high with new supply still struggling to match demand.
"If we remove the LVRs at this point then you really run the risk of house price inflation starting to increase," Wheeler said. He declined to give a time on when he plans to start pulling back on the restrictions, and said it would probably be an easing of the limits rather than an outright removal.
ASB Bank chief economic Nick Tuffley said the risk in a resurgence in house prices was real, with the impact of net migration an unknown. He expects the Reserve Bank to start pulling back on the limits in the second or third quarter next year.
"We see the most prudent exit as lifting the 10 percent 'speed limit' to 15 percent, then potentially 20 percent before completely removing them," Tuffley said in a note. "Exiting in a gradual way is a hedge against having the market reignite, while lifting the speed limit is simpler for banks to administer than lifting the 80 percent LVR threshold to, say, 90 percent."
New Zealand house price inflation rose was an annual 5 percent in the three months ended Sept. 30, slowing from a 9.4 percent rate a year earlier, with the level of new low equity lending falling to 7.3 percent from 24.4 percent before the restrictions were imposed. The bank said the restrictions had a more pronounced impact on first-home buyers, with about 35 percent of high-LVR lending to prospective new entrants, and the rest to other owner-occupiers.
A key condition for the removal of the policy is a "sustained moderation in house price inflation to about the same rate of growth in household incomes," and while there has been a slow-down, the bank said there is still a risk of a resurgence in demand.
"A significant gap between the projected requirement for new housing and the available supply of housing is expected to persist for some time," the bank said in its report. "Further, with net immigration at high levels and mortgage rates still historically low, there remains a risk of a resurgence in housing market pressures."
Wheeler reiterated that the New Zealand dollar was unjustifiably and unsustainably high given the sharp drop in commodity prices and has further to go since its decline from a peak in early July.
"How much it moves to some extent or a large extent depends on what happens to the US dollar and whether we're at the start of a significant appreciation in the US dollar," he said.
The kiwi fell to 77.92 US cents from 78.18 cents immediately before the report's release, and recently traded at 78.11 cents.
While New Zealand's overall financial system remained sound, risks in the dairy sector increased as plunging global milk prices prompted a reduced forecast payout to farmers by Fonterra Cooperative Group. The world's biggest dairy exporter expects to pay $5.30 per kilogram of milk solids, down from $8.40 a year earlier, and the lowest payout in six years. .
"The forecast dairy payout for the coming season has been reduced significantly, and could result in rising loan defaults should the lower payout level persist," deputy governor Grant Spencer said in a statement.
Wheeler said the bank hadn't given any thought to imposing lending restrictions or ratios on dairy lending, and that about 10 percent of farmers still have about half of the sector's $33 billon in debt.
Fonterra is holding its annual meeting in Palmerston North today, and affirmed its forecast payout for the current season. Chief executive Theo Spierings has previously said the forecast is predicated on a recovery in whole milk prices.
The Reserve Bank expects dairy prices to recovery early next year, supported by growing Chinese demand, though it said there is a risk of protracted weakness if global supply keeps expanding or if China takes longer to resume its forward purchasing.
Farmers had used last year's high price to repay debt, and the early signalling gave them time to manage down their costs, which helps mitigate the threat posed by the dairy sector.
Spencer said farmers' deleveraging and higher farm prices meant average LVRs on dairy debt had reduced, meaning safety buffers in place on dairy farm debt have improved.
The Reserve Bank said farms using intensive methods on more marginal land and less able to substitute to feed produced on their own farms were particularly vulnerable, with limited scope to manage the downturn, and highly indebted farmers were likely to experience negative cash flow on the lower payout.
Other risks to the country's financial system were an abrupt slowdown in the Chinese economy, which accounts for about 19 percent of New Zealand's exports, and local lenders' reliance on overseas funding, leaving them vulnerable to change in the cost and availability of credit.