Loan-to-value ratios are designed to moderate housing
inflation. Photo by ODT.
The Reserve Bank yesterday defended the introduction of
its loan-to-value ratios (LVRs), which are being blamed for the
substantial drop in first-home buyers in September.
Deputy Reserve Bank Governor Grant Spencer said the LVRs,
introduced on October 1, were aimed at moderating house price
inflation by reducing the effective demand for housing.
''While they should help to reduce house price inflation, New
Zealand house prices are likely to remain high on most
''In this sense it is hard to see how LVR restrictions will
materially reduce the existing incentives to develop new
The impact of LVR restrictions would not be uniform across
Market segments with a higher proportion of high-LVR
borrowers were likely to see larger effects, as would areas
where house prices and borrower incomes exceeded the criteria
for the exempt Welcome Home loans, he said.
The LVR restrictions were intended to reduce the build-up of
systematic risk in the New Zealand financial system.
They would also potentially reduce the extent of interest
rate increases and exchange rate pressure that might be
needed in the coming cycle.
The LVR restrictions were also expected to reduce risk in
banks' balance sheets, Mr Spencer said.
On Monday, the BNZ-REINZ residential market survey showed
substantial falls across all measures, including the
proportion of agents noticing more first-home buyers in the
A net 41% of agents said there were fewer new buyers around,
the first negative for the series, down from a net 24%
noticing more first-home buyers in September, and well down
below the average of 31%.
BNZ senior economist Craig Ebert said houses sold fast in
September, with the days to sell falling to 31, the lowest
reading for a September since 2006.
However, it was important to note the results were ''lagged''
and almost certainly included a rush to beat the perceived
October 1 deadline for the LVR policy regulation. October's
housing data would be the first real test.
''One way or another, house prices will come to heel. It
helps the Reserve Bank is now making it clear it won't be
happy until this is achieved, having earlier seemed tolerant
of house price inflation so long as it didn't spill over into
"And it will do whatever's necessary to achieve the
The BNZ was not against the macro-prudential framework - even
implementation of the LVR restrictions, Mr Ebert said.
The bank felt the Reserve Bank had rushed the policies into
play without being sufficiently clear about thresholds for
intervention, what it was trying to achieve with the new
tools and how it was all supposed to fit with orthodox
Mr Spencer said in his speech to the Property Council, in
Auckland, the underlying issue in the New Zealand housing
market was a shortage of supply.
In Christchurch, it was a result of the earthquakes. In
Auckland, the shortage had been growing over a much longer
period, with weak rates of housing construction since 2005.
House price inflation had accelerated only over the past two
years, coinciding with low interest rates, easier bank credit
and a growing trend among renters to become first-home
buyers, he said.
The recent turnaround in inward migration was also adding to
the excess of demand over supply.
Moves to increase the housing supply were well under way and
residential building consents were moving upwards.
A more responsive supply side was the key and would require a
responsible and innovative building sector and an adequate
supply of labour, some of which would need to be imported. A
responsive planning and consenting process was also needed,
Mr Spencer said.