LVR restrictions promote financial stability by limiting high-risk mortgage lending. This is done with the aim of reducing the impact and severity of housing market corrections by increasing the resilience of the banking system and households, said a RBNZ statement on Wednesday.
Current LVR settings were put in place in November 2021 when risks were elevated. The restrictions have built resilience in the financial system, which has been evident in the past year as house prices have fallen without widespread impacts on financial stability, the statement said.
"Our assessment is that the risks to financial stability posed by high-LVR lending have reduced to a level where the current restrictions may be unnecessarily reducing efficiency, and in particular, impeding the provision of credit to some otherwise creditworthy borrowers, which is not proportionate to the level of risk that we see," said RBNZ Deputy Governor Christian Hawkesby.
National house prices have fallen towards a level that is more consistent with medium-term fundamentals. As a result, while house prices may continue to fall, the probability of a further large correction in house prices has reduced, Hawkesby said.
Alongside this, lending conditions have tightened significantly as banks' debt servicing assessments allow for higher interest rates, he said, adding that restrictions on high-LVR residential mortgage lending set a "speed limit" on how much new low-deposit lending banks can do.
The RBNZ is consulting on the implementation of this proposal over the next two weeks with registered banks. Members of the public are also welcome to provide feedbacks on the proposal.
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