No need for RBA to follow RBNZ in tightening home loan standards

Kieran Davies

Coolabah Capital

Faced with an overheating housing market, the RBNZ is tightening lending standards for home loans by reinstating pre-pandemic loan-valuation ratio (LVR) restrictions that were removed in April last year and tightening them further for investors in May. In March, owner-occupier loans with LVRs above 80% will be limited to a maximum of 20% of new mortgages and investor loans with LVRs above 70% will be restricted to at most 5% of new mortgages. In May, the investor maximum of 5% of new lending will apply to LVRs above 60%.

Tighter lending standards reflect the RBNZ’s concern about the “risk a sharp correction … poses for financial stability” given “evidence of a speculative dynamic emerging” driven by “highly-indebted borrowers, especially investors”. Such concern is not surprising considering that New Zealand house prices have reached an all-time high, up 14% over the past year, with housing debt growing at an annual rate of 7% as investor lending surges to the highest level in its short history.

In contrast, the RBA is unlikely to tighten already-conservative lending standards for Australian mortgages given no local signs of overheating. Australian house prices are recovering from a small fall during the pandemic, but nationally they have only recently returned to 2017 levels. Housing debt is hardly growing at an annual rate of 2%, while investor lending is recovering from its lowest level in decades, outpaced by a rapid rebound in lending to owner-occupiers.

If the situation changed and signs of overheating emerged, it is worth noting that the RBA would likely take a different approach to the RBNZ’s LVR strategy, with Governor Lowe indicating that Australian regulators would most likely revisit measures temporarily imposed by APRA some years back that limited growth in risky lending and effectively tightened serviceability buffers used in mortgage calculations.

This suite of tools was designed and implemented by APRA and are referred to as "macro-prudential" constraints. They were very effective at cauterising exuberance in the lending and housing markets, and precipitated a sharp correction in Aussie house prices of c.10% between 2017 and 2019, which CCI forecast at the time...


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1 contributor mentioned

Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...

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