RBNZ proposes new LVR restrictions to mitigate risks from overheating of real estate

RBNZ proposed to broaden the loan-to-value restrictions currently in place in Auckland to the rest of the nation in an effort to mitigate risks from financial stability stemming from property overheating. The change would remove the current distinction between lending in Auckland and the rest of the country.

The changes the RBNZ has proposed are the following:

−     Applying a nationwide speed limit for all investor lending, permitting no more than 5percent of lending at an LVR greater than 60percent. 

−     Applying a nationwide speed limit for all owner-occupier lending, permitting no more than 10 percent of lending with an LVR of greater than 80 percent.

New Zealand's banking system is heavily exposed to the property market and investor lending has been increasing rapidly, RBNZ Governor Graeme Wheeler said. Wheeler noted that a sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country. The consultations will conclude on August 10 and new restrictions will take effect on September 1.

The announcement led to the markets to believe that the central bank will reduce its official cash rate sooner rather than later as lowering interest rates will make it cheaper to finance lending to purchase a house. The Kiwi slumped after the news crossed the wires. New Zealand front-end government bond yields fell alongside the Kiwi’s decline.