Reserve Bank governor Adrian Orr said today the bank would ease its loan:value ratio (LVR) restrictions on banks’ new mortgage loans from 1 January.
Reserve Bank loan:value ratio (LVR) restrictions on new mortgage loans from 1 January 2019:
- Up to 20% (increased from 15%) of new mortgage loans to owner-occupiers can have deposits of less than 20%
- Up to 5% of new mortgage loans to property investors can have deposits of less than 30% (lowered from 35%).
Mr Orr made the announcement when he released the bank’s November Financial Stability Report. He also put dates on 3 other reviews:
- A final consultation paper on bank capital requirements in December
- Jointly, with the Financial Markets Authority, reviewing banks’ responses to that review in March, and following up as required, and
- An ongoing review of conduct & culture in the insurance sector, also with the Financial Markets Authority, to be released in January.
Mr Orr said in today’s report:
“Risks to New Zealand’s financial system have eased over the past 6 months, but vulnerabilities persist. In particular, households remain exposed to financial shocks due to their large mortgage debt burden.
“However, both mortgage credit growth & house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending. In response, we are easing our loan:value ratio (LVR) restrictions on banks’ new mortgage loans. If banks’ lending standards are maintained, we expect to further ease LVR restrictions over the next few years.
“Debt levels also remain high in the agriculture sector, particularly for dairy farms, implying ongoing financial vulnerability. Balance sheets need to be further strengthened. In the medium term, an industry response to a variety of climate change-related challenges appears likely, requiring investment.
“While domestic risks have eased, global financial vulnerability has risen. Significant build-ups in debt & asset prices, and ongoing geopolitical tensions, overhang financial markets.
“This vulnerability is highlighted by the current elevated price volatility in equity & debt markets. New Zealand’s exposure to these global risks has reduced somewhat, as New Zealand banks have become less reliant on short-term, and foreign, funding.
“The domestic banking system remains sound at present. We are using this period of relative calm to reassess whether the banking system has sufficient capital to weather future extreme shocks. Our preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient. We will release a final consultation paper on bank capital requirements in December.
“The banking system remains profitable, reflecting banks’ low operating costs & strong asset performance. While positive overall, banks’ low costs have been partly achieved through underinvestment in core IT infrastructure & risk management systems in New Zealand. This was highlighted in our review of bank’s conduct & culture with the Financial Markets Authority. We will be jointly reviewing banks’ responses to our review in March, and following up as required.
“CBL Insurance Ltd was placed into full liquidation by the High Court on 12 November. Aside from CBL, the insurance sector as a whole is meeting its minimum capital requirements.
“However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions. Our ongoing review of conduct & culture in the insurance sector with the Financial Markets Authority will illuminate the industry’s risk management capability. The review will be released in January.”
Attribution: Bank release.