Housing loans seen to be high risk by the Reserve Bank – those where borrowing exceeds 80% of the property value, or 80% Loan-to-Value ratio) – have been limited in availability since October 2013.
In a nutshell, banks have been required to direct no more than 10% of their residential lending to high LVR loans. That’s because the Reserve Bank believes the housing market poses a risk to financial stability in New Zealand. Housing lending makes up about half of bank lending in this country, and a home is usually the single largest asset that a family owns.
These factors mean that any instability in the housing market could undermine the stability of the wider banking system and economy.
Is it working? It’s hard to say, as there are conflicting verdicts from all corners. In May, though, the RBNZ acted to further tighten lending requirements in Auckland – and relax them slightly in other areas – as follows:
• Require residential property investors in the Auckland Council area using bank loans to have a deposit of at least 30 percent.
• Increase the existing speed limit for high LVR borrowing outside of Auckland from 10 to 15 percent, to reflect the more subdued housing market conditions outside of Auckland.
• Retain the existing 10 percent speed limit for loans to owner-occupiers in Auckland at LVRs of greater than 80 percent.
The policy changes are proposed to take effect from 1 October.
The good news is that loans to first home buyers are not excluded totally. In fact some loan types are exempt, such as construction loans and Welcome Home loans. If a first home buyer’s loan application is sound enough, there will be a bank that has not reached its 10% limit on this type of loan, so the message is to shop around. The Reserve Bank has indicated that its focus is not so much first home buyers as property investors, and residential construction activity will be excluded.