On 1 October 2013 the Reserve Bank of New Zealand introduced
measures to restrict the value of "high LVR" residential
loans that New Zealand banks can make. LVR stands for Loan to Value
Ratio and represents the ratio of the loan amount to the value of
the mortgaged property which secures the loan. The NZ Reserve Bank
has defined a high LVR as one where the loan amount is 80% or
greater of the value of the security property.
Describing the restriction as a "speed limit" on new
lending, the NZ Reserve Bank regulation restricts the dollar value
of high LVR new residential mortgage lending to 10% of the total
value of the new loans written. In other words, 90% of new loans
written by banks in New Zealand must be supported by a deposit of
20% or more.
The reason for the restriction, according to the Reserve Bank,
"...reduce the risk of a sharp housing
downturn and the loss of equity that would
It appears that the strategy is working. In April this year the
Reserve Bank released figures showing that since October 2013 house
prices in New Zealand have fallen by about 2.5%.
The opposite trend is occurring in Australia. On 28 May 2014 the
SMH reported that the proportion of new mortgages issued in the
March quarter with an LVR above 80% rose from 34.2% to 34.8%.
During that same quarter house prices in Australian capital cities
(as measured by the Australian Bureau of Statistics) rose by 1.7%
with Sydney leading the growth at 2.3%.
The Australian regulator appears to be taking note. In late May
2014 APRA issued its "Draft Prudential Practice Guide –
APG 223 – Residential Mortgage Lending" for
consultation. In the draft Guide APRA ominously warns that in times
of rapid house price appreciation it may be appropriate for a bank
to "strengthen its LVR constraints".
here for the link to the Draft Prudential Practice Guide.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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