Reserve Bank governor Adrian Orr says the LVRs have been successful in reducing the more excessive household mortgage lending and improving the resilience of banks. Yet fears of excessive high LVR lending led the Reserve Bank to decide not to ease the current settings.

Orr says financial system vulnerabilities remain “elevated” and international risks have increased. He sounded a caution about the low rate environment leading to increased debt and inflated asset prices.

It means low rates are necessary and have helped to cushion the New Zealand economy and borrowers from the effects of weaker global growth.

But, over the longer term, prolonged low interest rates could lead to some borrowers taking on too much debt and asset prices becoming overheated, Orr says.

“This could increase the vulnerability of the economy and borrowers to future economic downturns.”

The upshot is that current LVR rules will remain for the medium term. CoreLogic senior property economist Kelvin Davidson says that, given emerging signs of a pick-up in the housing market, making no change to the LVR rules seems the most sensible decision.

“While there will no doubt be some disgruntled would-be home-owners/ investors out there, it’s not as if housing currently needs a policy-driven boost.” For Westpac chief economist

Dominick Stephens, the Reserve Bank’s decision to keep the LVRs on hold was expected due to the strengthening of the housing market.

“We believe the Reserve Bank intends to ease the LVRs, as it moves away from ‘macroprudential’ polices in favour of ‘microprudential’ measures, like bank capital requirements. But based on our forecast of 7% house price growth over 2020 and 2021, we think the next change to LVRs could be some time way.”