Tighty, loosey

The Reserve Bank has carried through on its recent call for “action to reduce housing imbalances”. The latest sixmonthly Financial Stability Report, released last week, detailed a new set of loan-to-value ratio (LVR) restrictions targeted at what is seen as the frothiest end of the market: property investment in Auckland. While some in the market will no doubt see this as removing a barrier to OCR cuts, we’re not entirely convinced.

The RBNZ has proposed that from 1 October, all new lending on investor property in the Auckland region will be capped at an LVR of 70%. For owner-occupied housing loans within Auckland, the share of high-LVR lending will remain capped at 10%, while outside of Auckland the high-LVR share for all types of residential lending will be lifted to 15%.

We should stress here that the RBNZ’s move is not a challenge to our forecasts. Since last November, we’ve been saying that the next move on macro-prudential policy would be a further tightening, with a likely implementation date in the second half of 2015. In our latest Economic Overview we predicted a 10% rise in house prices this year; without a macro-prudential tightening we would have forecast something even higher.

In fact, the new restrictions are on the mild side of what we expected. The LVR cap on investor property loans had to be at least as tight as 70%, since very few investor loans are done at above 80%. The Auckland-specific cap on property investor loans is less intrusive than a nationwide cap would have been. And the easing of the high-LVR share for the rest of the country was an unexpected stimulus, although the impact may be modest as the existing 10% cap hasn’t been binding lately.