RBNZ capital increases on housing market & interest rates

Impact of RBNZ capital increases – High LVR May Cost Investors More

Whoop whoop – we have our finger on the pulse! The RBNZ announcement today that bank’s will be required to hold more capital on high LVR (loan-to-value) residential mortgages is a smart move in the right direction. Something I’ve been ranting about for a while.

Higher capital will reduce bank profitability on high LVR mortgages. This will force banks to think differently about how they compete in this part of the market.

I’d expect to see more of the following:

• Price differentiation (better pricing on mortgages under 80%)

• Less negotiation on pricing for loans over 80%

• Enforcement of Low Equity Fees and Margins.

• Tighter credit policy on having multiple properties over 80%

I don’t see it have a dramatic effect on the bank credit policies beyond where they are today. As a First Home Buyer you will still be able to buy with a small deposit. We will still see 95% lending for First Home Buyers but banks will be tougher on pricing.

It will likely become harder for investors who are trying to buy multiple properties over 80%. If this is you, then you ability to keep leveraging properties in this market will be limited.

For existing bank customers over 80%, you’ll likely find the bank less inclined to provide discounts when your fixed rate loan matures.

A positive side effect of the RBNZ shift towards prudential tools is that it reduces the likelihood of interest rate increases. Like I said in last month’s post, it is in everyone’s best interest to have a stable property market.

In of itself these changes wont be enough, but it’s in the right direction. Personally, I’d like to see the RBNZ hit foreign capital harder. A policy response I’d like to see is where NZ based lending needs to be serviced off NZ based income.

Imagine, if through the use of prudential tools, the RBNZ could take enough heat out of the property market to drop interest rates by another 1.00%. That would hit the foreign speculators hard (drop in NZD would hit those borrowing in foreign currency) and would increase disposable incomes where it matters.

By John Bolton (J.B)

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