Reserve Bank backs down on loan rules for new homes

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 deposits.

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 Christchurch."

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."


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