NZ banks ease up on high LVR’s – Kelvin Davidson

It’s interesting to see the figures from the Reserve Bank in New Zealand, the first available after easing of LVR rules there. They show that the NZ banks started to use their new freedom last month, lifting the share of high LVR lending to owner occupiers.  Core Logic New Zealand senior property economist Kelvin Davidson outlines the impact and possible implications of this trend.
Kevin:  It’s interesting to see the figures from the Reserve Bank in New Zealand, the first lot available after easing of LVR rules there. They provide an interesting insight showing that the banks started to use their new freedom last month, raising the share of high LVR lending to owner occupiers from 9.8% in December to 12.1%. That’s, of course, still well below the new spend limit of 20%. Joining me to talk about this and some of the implications going forward for the New Zealand property market, I’m joined by CoreLogic’s senior property economist Kelvin Davidson. Kelvin, thanks very much for your time.
Kelvin:  A pleasure.
Kevin:  Okay, so what were the figures for January?
Kelvin:  The Reserve Bank reported that gross lending flows in January were $4.1 billion, up about 360 million from a year ago. So a rise of around about that 10% figure.
Kevin:  And I understand that owner occupiers contributed most of that increase. Is that right?
Kelvin:  Yeah, owner occupiers actually contributed all of it, so we’ve seen investor flows actually remain pretty flat year on year. So we’ve seen an overall increase for about the last 12 or 13 months, and most of that’s been driven by owner occupiers. So investors have been biding their time. They’re not dropping their lending but they’re not increasing it either.
Kevin:  What about number of loans? What’s happened there?
Kelvin:  Number of loans actually been pretty flat for a while now, perhaps 12 to 18 months. So they’ve been hovering kind of range bound is how I’d described them within the 20 to 25,000 mark per month. Around about in that range. So, yeah, pretty flat for a couple of years.
Kevin:  Based on what you’re seeing there and the feedback that you’re getting, Kelvin, what would you see the impetus is going to be like going forward?
Kelvin:  I think there’s still a bit of momentum there. We’ve had obviously these LVR rules have been loosened and I think that could provide a little bit of a one off boost, I’d say. There’s reasons to think that it won’t go too far, both supply and demand really. So it’s from the supply side. Banks themselves are still pretty cautious and they only want to lend to the absolute best borrowers.
Kelvin:  They’re potentially down the track going to face the Reserve Bank imposing higher capital requirements on them. So they’re thinking, yeah, we’re going to have to hold more in our balance sheet in future so that’s less to lend out now. So I think there’s a supply side restraint going on for lending. And then from the demand side too. I think, as I mentioned, the banks are only really targeting the best borrowers. And that pool of borrowers is not unlimited ’cause there’s only a finite pool of good borrowers so that demand is not infinite.
Kevin:  Of course, on top of all of this we also have the tax working group’s recommendations for capital gains tax on residential rental property. I wonder if you’d bring us up to date on that. Were there any surprises in those recommendations?
Kelvin:  No, not really anything major. The tax working group released an interim report three or four months ago. They’ve pretty much flagged up all of the things that were talked about in the final report. So no real major surprises, the key point being that they’ve recommended basically extending the capitol gain. Actually, we already have a capital gains tax in New Zealand called the bright-line test and people are overlooking that, I think, to a large degree.
Kevin:  What’s that called? The bright-line is it?
Kelvin:  Yeah, the bright-line test. It’s basically a capital gains tax on residential property if you buy and sell within a short period of time. So it’s really targeting property speculators to try and, if they are going to speculate, well at least they’ll be paying some tax on end gains. So really what they’re talking about here, what the tax working group is talking about, is effectively extending that to a wider base of assets really. So there’s no real surprises here. But there is a lot of water to flow under the bridge. It has to be basically voted on at the next election by the public. So, yeah, none of this is set in stone yet.
Kevin:  Okay. Well, given what you’ve told us and we’ve seen the growth to $4.1 billion in January, what do you see the share of owner occupier lending at high LVRs. What’s that likely to increase to, do you think?
Kelvin:  Yeah. Well, so it was up at 12.8% in January. I think it can go a bit further. The spend limit’s 20% so still a wee way to go to hit that spend limit. But what we’ve seen in the past is that the banks will increase it to about five percentage points below the spend limit. They like to keep that buffer as a sort of safety net, I suppose, and they don’t want to run the risk of going over the spend limit. So I think probably, given that the new speed limit’s 20%, I’d suspect that that figure will flatten off at about 15. So I think there’s still a little bit of impetus to come from the LVR loosening, but it’s not going to be a permanent ongoing boost to activity.
Kevin:  Kelvin, thank you very much for joining us. Kelvin Davidson has been my guest. He is the CoreLogic senior property economist in New Zealand. Kelvin, thanks again for your time.
Kelvin:  No worries. Thank you.

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