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Runaway Market Could Mean Tighter LVRS

The housing market is on the rise again but if its upward trajectory gets out of control it could prompt a tightening of the loan-to-value ratios (LVRs).

By: Property Investor Team

31 January 2020

It was just a few short months ago, prior to the Reserve Bank’s last Financial Stability Report (FSR) in November, that economists were suggesting the time was right for the LVRs to be relaxed further.

However, as it turned out, the Reserve Bank opted to keep the LVRs on hold amid fears that record low interest rates “could lead to a resurgence in higher-risk lending”. Now a housing market resurgence is well underway and economists think the

Reserve Bank could look to reign it in with the LVRs if need be. In one of their recent Weekly Focus publications, ANZ’s economists say a stronger housing market is a mixed blessing.

On the plus side, a strong housing market supports sentiment and GDP growth but, on the downside, it’s not the sort of growth needed, they say.

“Household debt is already very high, housing affordability is already a significant economic and social problem, and house price rises further exacerbate wealth inequality.

“If things really start to get silly, the Reserve Bank has the option of tightening up LVR restrictions once more. We wouldn’t rule it out.”

For independent economist Tony Alexander, the growing strength in Auckland’s housing market might cause people to worry the Reserve Bank will raise interest rates to try and stem the strength.

But that’s not likely how things will go, with the Reserve Bank only likely to change the OCR to influence overall inflation in the economy, he says.

“The Reserve Bank’s focus is going to be on the nature of bank lending which might follow then propel further strength. So if risky lending jumps up then they will raise LVR requirements ahead of taking the OCR higher.”


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