No need for RBA to follow RBNZ in tightening home loan standards
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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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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