Loan to value ratios

The Herald reports:

Prime Minister John Key was adamant yesterday the Reserve Bank and retail banks could find a way to exempt first-home buyers from proposed restrictions on low-deposit home loans.

At his post-Cabinet press conference, Mr Key said he supported the move by the Reserve Bank that would see banks limit how much of its new mortgage lending could be made on high loan-to-value ratios (LVRs).

He indicated any measures negotiated would be unacceptable if they penalised first-home buyers at the expense of speculators and property investors.

“Yes I accept absolutely and endorse the view that the banks should be forced to use this as a legitimate tool.

“I don’t think it should be a tool that is used to write high LVR ratios for a bunch of rich people, and lock out a whole lot of first-home buyers.”

I’m not so sure it is as easy as the Reserve Bank or the PM thinks. First let’s look at how big the “problem” is.

This data is from the five major NZ banks.

So the top three lines are all mortgages with LVRs below 80%.  They comprise four fifths of the total mortgages, and this was much the same in 2008.

There has been virtually zero growth in high LVR loans (over 90%) since 2008 despite there being solid growth in the housing mortgage market.

Essentially, of the approximate $185 billion of housing lending in NZ currently around $150 billion worth of it has an LVR of under 80%.

I think both the RBNZ are the Government somewhat over egging the problem and the need for LVRs.

We also have to be careful of the possibilities of unforeseen consequences. Restrictions on how much a bank can loan to home buyer may mean that they seek unsecured funding, rather than secured funding. This actually happened in Sweden, and actually works to decrease financial stability.

The proposed policies work fairly well in housing markets when there is an over-supply. But in NZ the problem is more an under-supply.