Could the Reserve Bank restrict interest-only lending too?

New restrictions on interest-only lending across the Tasman will have been noted by the Reserve Bank. Photo: Lynn Grieveson

Australia's bank regulator has just launched a crackdown on interest-only lending, raising questions about whether the Reserve Bank of New Zealand could do the same here. Any similar limit on this side of the Tasman would significantly restrict lending to landlords in particular, but economists don't think New Zealand's regulator is looking at using the tool -- for now.

The Australian Prudential Regulation Authority (APRA) announced on Friday it had directed banks there to limit new interest-only lending to 30 percent of total mortgage lending. The move surprised many in Australia and sparked warnings it could drive house prices across the Tasman down by 10 percent.

APRA also directed banks to strictly limit lending with loan to value ratios of over 80 percent and to ensure overall lending growth did not exceed 10 percent per annum. The Australian regulator has previously lagged others in directing banks to limit mortgage lending, but it has played catch-up with its latest letter to banks.

"APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile," APRA Chairman Wayne Byres said in announcing the restrictions. Almost 40 percent of Australia's home loans are on interest-only terms. Byres said he was particularly interested in interest-only loans with terms of more than five years.

The Reserve Bank of New Zealand, which both sets the Official Cash Rate and regulates banks and insurers here, has previously said it was not interested in limiting interest-only lending, even though it highlighted the high and growing levels in its Financial Stability Report in May last year (Page 45).

Instead, our Reserve Bank has focused on limiting loan to value ratios (LVRs) and is looking at whether to introduce a new tool to limit debt to income multiples (DTIs). It implemented its third round of LVR controls in the second half of last year, which has been a factor in slowing house price inflation in Auckland. Governor Graeme Wheeler pointed in early March to that moderation of house price inflation as a positive sign. However, he also said it was too early to say the moderation was sustained.

The potential impact of interest-only lending restrictions would be substantial.

Monthly Reserve Bank figures show new interest-only lending of $1.459 billion in February made up 33 percent of all new lending and total interest-only lending of $64.9 billion represented 28 percent of all mortgage lending. Interest-only lending to landlords was $584 billion in February or over half of new lending to landlords. Limiting interest-only lending to landlords to less than 30 percent of new lending, for example, would have a major impact on that market.

Economists think the Reserve Bank is not planning such a move here yet, but may revisit the area at a later date if it wants to further squeeze credit growth during an extended period of very low interest rates.

ANZ Senior Economist Philip Borkin said interest-only restrictions were not on the regulator's radar at the moment, but believed the Reserve Bank should look at it in the future because interest-only lending in New Zealand was not far below levels seen in Australia.

"I don't think the Reserve Bank is really in a mindset to implement any new measures right now, but having additional tools is always a good thing for a central bank," Borkin said.

Might it happen anyway?

The restrictions may happen anyway, even without the Reserve Bank's intervention.

The big four banks here are owned by the same big four banks that are regulated by APRA. The big four, ANZ, CBA, Westpac and NAB, introduced restrictions on lending to non-residents in Australia after a warning from APRA. The new policy restricted the banks from taking into account foreign income. Their New Zealand units, ANZ, ASB, Westpac and BNZ respectively, then adopted the same policy here without prompting from the Reserve Bank.

"Maybe the banks will adopt policies that will flow through here," Borkin said, referring to the policy on foreign income as one precedent.

"That was a common Trans-Tasman policy, so there could be something along those lines that if banks in Australia are looking at this differently then they could have a quiet word about some of the lending practices here," he said, noting he was not involved in setting the policy for ANZ here.

APRA's moves have already had an impact in New Zealand. Last month we reported that a warning from APRA about lending to property developers was a factor in closing down lending to developers of residential apartment projects in Auckland.