15 May 2014

RBNZ keeps an eye on new mortgages

7:17 am on 15 May 2014

The Reserve Bank says it's watching banks' new lending.

The bank has released its twice-yearly Financial Stability Report, and it says the financial system is sound, but household debt is high relative to income and house prices are overvalued.

The central bank estimates house prices would likely have risen another 2.5 percentage points if it hadn't introduced restrictions on lending to people with small deposits.

Restrictions on lending to people with less than a 20 percent deposits were introduced in October last year.

Banks are only allowed to lend a tenth of their total new lending to such people.

Figures released by the Reserve Bank last month on new residential mortgage lending show that the riskier lending had dropped to 3.6 percent in March after exemptions such as for building new homes.

But total new commitments to lend by the banks jumped by $1.4 billion during March to $5.2 billion, compared with a commitment to lend of $3.8 billion in February.

That effectively means, if the commitments are drawn down, banks could dramatically increase their lending to people with small deposits.

Deputy Reserve Bank Governor Grant Spencer.

Deputy Reserve Bank Governor Grant Spencer. Photo: RESERVE BANK

Radio New Zealand asked if the central bank was keeping an eye on bank's new lending, and Reserve Bank deputy governor Grant Spencer said the RBNZ was watching the monthly developments.

"We would expect that now the banks have got used to running this system and making sure that they stay within the limit, that they will be able ot move up and stay a bit closer to the 10 percent".

"I think the banks are probably doing that now.

"Rather than just shutting off the tap - as they did to start with - they'll be getting a bit more of the LVR lending out there".

Actual lending was up $815 million in March, compared with $686 million in February.