By Paul McBeth
July 1 (BusinessDesk) - The Reserve Bank will loosen its curbs on mortgage lending provided it sees stable household debt-to-income levels, prudent lending standards from banks, and moderating house price inflation.
Deputy governor Geoff Bascand says the bank's loan-to-value ratio restrictions, imposed in 2013, have made the country's banking system more resilient by limiting the potential impact of a house price collapse. The Reserve Bank is comfortable dialling back the restrictions as the risks to the system have abated.
"Specifically, we want to see household debt levels remaining stable relative to incomes, prudent lending standards from banks, and moderate house price inflation. If these conditions are met, we are inclined to continue easing the restrictions," he said in a speech to the Otago Foreign Policy School yesterday.
The current LVR restrictions impose a 15 percent limit of new loans to owner-occupiers with deposits of less than 20 percent, and 5 percent of loans to property investors on deposits of less than 35 percent.
Reserve Bank data show there were $707 million of new residential loans on LVRs above 80 percent in the month of May, out of $6.47 billion of new mortgage loans. A year earlier, there were $556 million of high LVR loans out of $6.59 billion of total mortgage lending that month.
Bascand yesterday said the central bank faces a long-term decision on removing the LVR restrictions entirely, and maintaining a permissive setting. That means weighing up efficiency costs for lenders against risky lending.
He also noted the central bank's proposals to increase capital requirements could lead to less active use of macroprudential tools including the LVR restrictions.
"That said, different tools are effective for addressing different risks, and there will still be a role for borrower-based tools to more directly address risks associated with household debt," he said.
The Reserve Bank will release submissions on its capital proposals later today. The regulator has faced vigorous lobbying from the banking sector, claiming the proposals will slow the economy by increasing the cost of credit.
Bascand said the process for using macroprudential tools was among the topics under consideration in a review of the Reserve Bank's governing legislation. He said use of the tools should remain under the bank's operational independence to avoid politicians facing undue pressure from lobby groups.
"Clearly, deploying macroprudential policy when it is needed does not make you popular, and therefore elected politicians may have difficulty committing to what is required for a long-term financial stability objective. Internationally, macroprudential tools are used far less actively in jurisdictions where the government is heavily involved in decision-making," he said.
The consultation paper, released last week, said there weren't very strong arguments for limiting the Reserve Bank's operational independence in setting capital and liquidity buffers.
The paper said there may be a stronger case for watering down independence in the use of special controls such as LVR restrictions or limits on debt-to-income ratios, ranging from limited consultation through to the minister making the decision. That would add legitimacy to the decision, but would raise the threshold for action.
Bascand said the Reserve Bank’s view was that the "controversial nature of these tools strengthens the case for operational independence, to ensure that the tool can be used promptly when necessary".
He also said the review's proposal to assign a formal advisory role to an inter-agency committee runs the risk of undermining the Reserve Bank's accountability and might not add much value "given that the Reserve Bank already consults extensively on macroprudential decisions".