The Royal Bank of New Zealand (their central bank) is considering the removal of the lending limits – similar to our own – because it’s a countercyclical tool that is no longer needed.
“More recently we have proposed removing mortgage loan-to-value ratio (LVR) restrictions, as this is a countercyclical tool and we have been able to consider lowering this now that the risks of excessive lending have subsided and banks can now lean into a recovery. This should also enable banks to support customer needs”
That spells it out fairly loud and clear, if the tool isn’t needed then why deploy it? At the moment we are seeing massive issues with sales due to banks restricting in order to comply with the lending rules, this is an unforeseen consequence that will damage certain borrowers who have entered into contracts in good faith.
It’s worth noting that we took our lead in part from New Zealand on the lending rules, our new Governor is from there and house prices in New Zealand are also high – but they are making a call between market damage that can be avoided and market damage which can come naturally from an imbalanced economy.
It isn’t our view that we should necessarily do this, but it is our view that it should be looked at if other areas with reputable central banks (who are often ahead of the curve compared to here) are thinking about it with good reason.
Their Deputy Governor Geoff Bascand said that “LVRs were introduced as a macro-prudential financial stability tool in October 2013 and have been adjusted over time. Adjusting the use and calibration of macro-prudential tools in response to economic conditions is how they are intended to be used”.
This move will help banks to keep lending to support customers, including with mortgage deferrals.
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