New residential construction loans will now be exempt from
the loan-to-value (LVR) restrictions introduced in October,
Reserve Bank Deputy Governor Grant Spencer said this morning.
Spencer said the bank had recently consulted with the
building industry and banks on the impact of LVR restrictions
on residential construction activity.
While high LVR construction lending is only around 1 per cent
of total residential lending, it finances around 12 per cent
of residential building activity.
"This exemption means that low deposit lending will fall
outside the 10 per cent speed limit if it is financing the
construction of a new house or apartment," he said.
"However, any new low deposit construction loans will still
need to meet the internal risk requirements of the lending
banks," he said.
The new exemption will apply to all qualifying construction
loans from October 1, 2013.
Spencer said the exemption would help to support the supply
of new housing and, in doing so, reduce some of the pressure
arising from excess demand in the New Zealand housing market.
The bank introduced limits earlier this year because it saw
high LVR lending as putting the financial system at risk.
ASB Bank economist Christina Leung said today's announcement
did not have a material impact on the monetary policy
outlook, and she continued to expect the Reserve Bank to
first lift the OCR in March 2014.
"We had expected any effects of the LVR restrictions on the
construction of new homes would largely come through in the
first half of 2014 given project lead times and consent
processing time," she said.
"The RBNZ's starting point was that the LVR restrictions
would have little effect on new building. However, early
evidence raised question marks about that assumption. This
exemption removes an unintended consequence of the LVR
restrictions, and may encourage construction growth at the
margin in the near term. However, given the new supply of
houses would likely be higher than otherwise with these
exemptions, there is likely to be less pressure on the
housing market over the medium term," said Leung
"Given the amount of new houses required to be built in
Auckland and Canterbury we continue to expect these two
regions will remain the key drivers of construction growth
over the coming years."
Registered Master Builders Federation chief executive Warwick
Quinn last month met Reserve Bank officials to update them on
the findings of independent research into the impact of the
policy on new home builds.
Quinn said the policy - which restricts the amount of lending
banks can extend to buyers with deposits of less than 20 per
cent - could affect as many as 3000 new home builds a year.
That figure was based on data showing that 15 per cent of the
20,000 new builds each year were for buyers with low
The research conducted by building research group Branz
suggested the impact was likely to be wider, Quinn said.
It suggested potential buyers with deposits over 20 per cent
were shying away from new builds because of the risk they
would require a top-up loan during construction which would
take them below the 20 per cent limit.
The research also indicated some people who would otherwise
have large deposits were unable to commit to new builds
because of difficulties in selling their existing homes due
to the effect of the loan limits on would-be buyers.
Reserve Bank deputy governor Grant Spencer, in a speech last
month, stressed why the bank has imposed a limit on high
loan-to-value ratio (LVR) lending, what its best guess of the
impact is and the indicators it will watch to decide when to
lift the restrictions.
While the bank estimates house price inflation will be 1 to 4
percentage points lower than it would otherwise be over the
year ahead, Spencer said house prices would still remain high
relative to incomes and rents.
"In this sense it is hard to see how these restrictions will
materially reduce the existing incentives to develop new
residential property. Provided the red tape, costs and delays
are reduced, there will remain a strong price incentive to
expand the housing stock, particularly in Auckland and
From 2000 to 2007 house prices more than doubled, and
household debt increased from 100 to 150 per cent of
disposable (after-tax) income.
"When the cycle turned in 2007, house prices fell 10 per cent
- a relatively benign fall compared with some countries ...
where house prices fell by 30 to 40 per cent."