Easy does it

The Reserve Bank has announced a further easing of its mortgage lending restrictions, as we expected. These changes, along with the recent falls in mortgage rates, are likely to see the housing market liven up over the coming months, adding to the flow of positive signals for the local economy. However, we still think that markets are misreading how the Reserve Bank will respond to the economic data, and that official interest rate hikes are some time away.

In its latest six-monthly Financial Stability Report the RBNZ announced a further easing of its restrictions on high loanto- value ratio (LVR) mortgage lending, following the modest easing that was announced a year ago. The ‘speed limit' for owner-occupier loans – the share of lending that can be above an 80% LVR – will be raised from 15% to 20%. For investor loans, the effective cap on LVRs will be raised from 65% to 70%. Both changes will take effect from the start of next year.

While household debt levels remain high, the growth in house prices and credit has moderated in recent years, and is now more broadly in line with household income growth. The LVR restrictions have no doubt played a part in this moderation. But since they were first introduced in 2013, they have been joined by a range of other forces that have dampened housing demand. Policies such as the ‘brightline test' for taxing capital gains have targeted investor demand, while the banking sector has moved to tighten lending standards in recent years.

We'd expect the housing market to respond to these LVR changes in a similar way to what we saw last year. Banks increased their high-LVR lending, but maintained a sizeable buffer below the maximum levels. Much of the additional leeway on owner-occupier lending appears to have gone towards first-home buyers. House price growth did pick up a little in early 2018, but it's hard to distinguish between the impact of the LVR changes and the drop in mortgage rates around the same time.

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