LVRs from 1 October

The Herald reports:

Reserve Bank Governor Graeme Wheeler said banks will be subject to restrictions on high loan-to-value ratio (LVR) housing mortgage loans from October 1.

He said banks would be required to restrict new residential mortgage lending at LVRs of over 80 per cent to no more than 10 percent of the dollar value of their new housing lending flows.

He said the LVR restrictions were designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.

In a speech today at Otago University, Wheeler said housing played a critical role in the economy but was also a major source of “value and risk” to the household sector and the banking system.

“The Reserve Bank is concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy,” he said.

“Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future,” he said.

So this move is not about lowering house prices, more about reducing the risk of a boom and bust cycle.

ASB’s chief economist Nick Tuffley said the Reserve Bank was continuing to highlight the need for fundamental issues such as the shortage of land and housing to be addressed in the long-term.

Freeing up land will do more for house prices than any other action. Almost every piece of independent research has confirmed the artificial scarcity of land for housing is the largest factor.

I’m not a huge fan of LVRs. They may be a necessary evil, but I think making it harder for people to get a mortgage is not the best way to take the heat out of the housing market.