Wait for it

The Reserve Bank has held fire for now on any changes to its restrictions on bank mortgage lending. We still think that the case for an easing of the restrictions will be made by the end of this year, as a range of government policies weigh on house prices. A softer housing market will also have a bearing on the wider economy, where confidence in the outlook is already fragile.

This week the Reserve Bank released its six-monthly Financial Stability Report, a wide-ranging review of New Zealand's financial system. The overall conclusion was that the risks to the system were little changed from six months ago, with the main areas of concern being household debt, dairy sector debt and exposure to international shocks.

The main area of interest for us was whether there would be any further changes to the macro-prudential restrictions on housing lending. In the last review in November, the RBNZ loosened the loan-to-value ratio (LVR) restrictions slightly, allowing investors to borrow up to 65% of the value of a house, and increasing the share of loans to owneroccupiers that can be made at an LVR above 80%.

The RBNZ also indicated that it would ease the restrictions further if it was satisfied that house price and credit growth had slowed to around the rate of household income growth, and that there was a low risk of the housing market taking off again. It's a close call as to whether those conditions have been met. House prices are up 3.8% in the last year, while credit growth is running at 5.7%yr. Comparable figures for household income growth aren't yet available, but last year it was running just above 5%.

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