The Reserve Bank of New Zealand (RBNZ) announced more rules to restrict low loan-to-value ratio (LVR) loans (defined as loans with lower than 20% equity) to the property sector yesterday, which will be implemented come October 1. The new restrictions will involve banks limiting the number of low LVR loans to 10% of total new mortgage loans extended, compared to a proportion of 30% recorded in February 2013 (a recent Moody's report puts average of major banks' proportion of low equity loans at 21%). Apart from the implementation of these macro-prudential measures, the central bank has also frowned upon the introduction of new financing schemes, urging banks to adhere to the 'spirit and intent' of the restrictions rather than just the wording, as it sees such schemes weakening the effectiveness of its policies. One such example that market observers have highlighted is the equity transfer scheme, recently launched by Westpac NZ , which allows parents to use equity in their homes to help their children buy property.
|Setting Off Alarm Bells|
|New Zealand - Household Credit & Growth, %|
As we have highlighted previously, the use of macro-prudential tools affords the RBNZ more flexibility with regards to its monetary policy at a time when the economic backdrop, though rosy for now, could face headwinds from external forces (see, 'External Risks Mean Rate Hikes Off The Table' , June 6). Indeed, we believe that macro-prudential tools will remain the preferred means of cooling growth in household credit, expecting more aggressive rules to be implemented over the next few quarters should the sector's credit growth not slow. According to the central bank, housing debt now towers at around 145% of household income and is close to 95% of GDP, closing on the previous highs recorded in 2009. Moreover, the central bank's fear of fuelling greater appreciation of the already over-valued New Zealand dollar through a rate hike is likely to further encourage the use of other tools rather than interest rates. As such, we maintain our expectations for the RBNZ to lengthen the pause in monetary policy, forecasting its official cash rate to remain at 2.50% until 2015.