LVR limits making an impact on bank lending

The Reserve Bank's home loan speed limits appear to be having an effect on New Zealand's housing market but economists say the real picture will not emerge until November's figures are released.

The central bank this week released statistics relating to its high loan-to-value ratio (LVR) mortgage lending, otherwise known as low-deposit lending.

The figures showed the high LVR lending fell in October after the restrictions were introduced on October 1. The rules require banks to reduce lending of LVRS above 80% to no more than 10% of their total new lending.

Deputy Reserve Bank governor Grant Spencer said high LVR lending, excluding exemptions, fell to 11.7% of total new mortgage lending in October, with exempted lending accounting for an additional 1.1% of total new lending.

The high LVR lending was down from 25.5% in September and had been around 30% earlier in the year.

''The reduction in high LVR lending will help to reduce the risks of a sharp correction in house prices in an already overvalued housing market. Such a correction could be damaging to the financial sector and broader economy,'' he said.

Westpac senior economist Michael Gordon said it was no surprise to see banks more or less operating in the limit. The 10% cap applied initially over a six-month period from October to March and it was understandable high LVR lending would be higher in the early months, given the legacy of pre-approved high LVR loans.

''What's more notable is the fall in the dollar amount of high LVR lending has been partly offset by an increase in low LVR lending. This may reflect seasonal patterns but we suspect a large part of the increase is genuine.''

That suggested the LVR limits had led to a shift in the composition of home buyers, ameliorating the overall impact on the housing market, he said.

Westpac predicted the nature of the speed limits would lead to a bifurcated market where lenders would not only try to ration demand for high LVR loans but would push to grow their low LVR lending so they could make more high LVR loans within the 10% limit.

''We concluded lower mortgage rates, along with reduced competition from first-home buyers, would create quite favourable conditions for those investors able to muster up a large enough deposit. Consequently, we expected only a modest impact on the rate of house price growth.''

The housing market had been consistent with the views of Westpac, Mr Gordon said. However, there would be no clear indication of the impact of LVR limits until at least the November figures.