Tag: NZ

RBNZ Defers LVR Changes

The Reserve Bank NZ is deferring the start of the proposed changes to investor loan-to-value restrictions (LVRs) nationwide from 1 September to 1 October 2016, based on feedback from the banking industry from its recent consultation on the proposals.

RE-Jigsaw

Deputy Governor, Grant Spencer, said:  “Banks have indicated through their submissions that more time is required to enable them to meet the new restrictions that apply to investor loans nationwide, given the pipeline of loan pre-approvals made prior to our announcement in July.

“We understand that banks have been applying the new LVR restrictions to new loan applications since the LVR changes were announced. On that basis we will defer the formal introduction of the changes to 1 October in order to accommodate the backlog of pre-approvals.”

Mr Spencer noted there had been a number of queries related to exemptions. He clarified that the range of existing exemptions to LVR restrictions will continue to apply under the proposed changes.  These exemptions permit the banks to make high LVR loans that would otherwise be limited by the restrictions.  Exemptions apply where:

  • Owner-occupiers or investors are constructing or purchasing a new dwelling (provided the loan commitment occurs prior to, or at an early stage of, construction of the dwelling).
  • Owner-occupiers or investors require bridging finance to complete the purchase of a residential property on a date prior to the completion of a sale of another property.
  • Owner-occupiers or investors are re-financing an existing high LVR loan, or shifting an existing high LVR loan from one property to another (provided the total value of the new loan does not increase).
  • Owner-occupiers or investors are borrowing to fund extensive repairs or remediation that is not routine or deferred maintenance.  This includes events such as a fire, natural disaster, weather tightness issues or seismic strengthening).
  • A loan is made under Housing New Zealand’s Mortgage Insurance Scheme, including the Welcome Home Loans scheme.
  • Borrowers with owner occupied and investor collateral can use the combined collateral exemption to obtain finance up to 60% of the value of the investment properties and 80% on their owner occupied property.

“It is important to emphasise that these exemptions are permissive but do not create an obligation on the banks to make such loans.  The banks will still apply their own lending criteria to individual borrowers and may choose to not provide finance in these circumstances or to provide it only at lower LVRs.

“The consultation process closed on 10 August and we are continuing to analyse submissions.  Further adjustments to the proposals, including the exemptions, are still possible and we expect to publish a final policy position later this month,” Mr Spencer said.

Under the proposed new restrictions:

  • No more than 5 percent of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60 percent (i.e. a deposit of less than 40 percent).
  • No more than 10 percent of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80 percent (i.e. a deposit of less than 20 percent).
  • Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

 

NZ Cash Rate Unchanged

The NZ Reserve Bank today left the Official Cash Rate (OCR) unchanged at 2.75 percent.

Global economic growth is below average and global inflation is low despite highly stimulatory monetary policy. Financial market volatility has eased in recent weeks, but concerns remain about the prospects for slower growth in China and East Asia especially. Financial markets are also uncertain about the timing and effects of monetary policy tightening in the United States and possible easings elsewhere.

The sharp fall in dairy prices since early 2014 continues to weigh on domestic farm incomes. However, growth in the services sector and construction remains robust, driven by net immigration, tourism, and low interest rates. Global dairy prices have risen in recent weeks, contributing to improved household and business sentiment. However, it is too early to say whether these recent improvements will be sustained.

House price inflation in Auckland remains strong, posing a financial stability risk. While residential building is accelerating, it will take some time to correct the supply shortfall. The Government has introduced new tax requirements and the Reserve Bank’s new LVR restrictions on investor lending come into effect on 1 November.

CPI inflation remains below the 1 to 3 percent target range, largely reflecting a combination of earlier strength in the New Zealand dollar and the 60 percent fall in world oil prices since mid-2014.

Annual CPI inflation is expected to return well within the target range by early 2016, as the effects of earlier petrol price falls drop out of the CPI calculation and in response to the fall in the exchange rate since April. However, the exchange rate has been moving higher since September, which could, if sustained, dampen tradables sector activity and medium-term inflation. This would require a lower interest rate path than would otherwise be the case.

Continued economic expansion is expected to result in some pick-up in non-tradables inflation, despite the moderating effects of strong labour supply growth.

To ensure that future average CPI inflation settles near the middle of the target range, some further reduction in the OCR seems likely. This will continue to depend on the emerging flow of economic data. It is appropriate at present to watch and wait.

RBNZ Drops Cash Rate To 3.25%

Statement by NZ Reserve Bank Governor Graeme Wheeler:

The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 3.25 percent.

Growth in the global economy remains moderate. Data on economic activity in the US, China and Australia has been mixed, although there has been some improvement in the euro area and Japan. Volatility in financial markets has increased.

The New Zealand economy is growing at an annual rate around three percent, supported by low interest rates, high net migration and construction activity, and the decline in fuel prices. However, the fall in export commodity prices that began in mid-2014 is proving more pronounced. The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the mid-point would be delayed.

Inflation has been low due to falling import prices and the strong growth in the economy’s supply potential. Wage inflation and inflation expectations have been subdued.

With the fall in commodity prices and the expected weakening in demand, the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified. In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand’s net external position on a more sustainable path.

House prices in Auckland continue to increase rapidly, and increased supply is needed to address this. The proposed LVR measures and the Government’s tax initiatives planned for 1 October 2015 should ease the impact of investor activity.

A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range.

We expect further easing may be appropriate. This will depend on the emerging data.