* RBNZ to loosen mortgage lending restrictions from Jan 2019
* Financial system risks have eased over past 6 months - governor
* RBNZ flags likelihood of higher capital requirements for banks (Re-casts, adds cenbank comments on capital requirements)
By Charlotte Greenfield
WELLINGTON, Nov 28 (Reuters) - New Zealand’s central bank on Wednesday said it would unwind mortgage restrictions as housing-related risks waned but signalled plans to ramp up banks’ capital requirements to address longer-term vulnerabilities.
At the Reserve Bank of New Zealand’s (RBNZ) half-yearly financial stability review, governor Adrian Orr said that mortgage credit growth and price inflation in the previously red-hot housing market had eased to a more sustainable rate, warranting looser loan-to-value (LVR) restrictions.
“Both mortgage credit growth and house price inflation have eased to more sustainable rates, reducing the riskiness of banks’ new housing lending,” Orr told reporters.
Nevertheless, the bank reiterated that the large mortgage debt burden left households exposed to financial shocks and that local banks’ high reliance on offshore funding left it vulnerable to external factors.
“There is no science to this. We have been calibrating it to where we have sufficient capital where the banking system is both sound through many economic conditions as well as efficient,” Orr told reporters. “That sweet spot is north of where bank capital has currently been.”
The central bank will release details of its plans in a consultation paper in December.
“Higher capital requirements provide banks with a greater buffer against unexpected losses, but they tend to increase the average cost of funding,” said Michael Gordon, senior economist at Westpac Bank. “This change would represent a tightening of financial conditions, to go with the easing via the LVR changes.”
House prices have risen more than 50 percent nationally over the past decade and almost doubled in Auckland, New Zealand’s largest city. But growth has slowed over the past 18 months from double digits in early 2017 to around 5 percent in October, due in part to the central bank restrictions.
The revised LVR rules, which come into effect on Jan. 1, ease deposit requirements for lenders. Under the relaxed rules, up to 20 percent of new mortgages issued by a lender to owner-occupiers can have deposits of less than 20 percent, up from 15 percent of such loans currently.
It also lowered the deposit threshold for new mortgage loans to property investors to 30 percent from 35 percent.
Orr also signaled that the restrictions would be loosened further in the “next few years” if banks’ lending standards were maintained.
The easing had been flagged by the bank and was widely expected, but economists said that the RBNZ still needed to juggle the risk that prices would take off again in the supply-constrained market, or even the risk of a price correction that would send jitters throughout the economy, which could partly explain why the central bank wanted to shore up capital buffers.
“Relaxation of the LVR restrictions is not without some risk,” said Nick Tuffley, chief economist at ASB Bank.
Reporting by Charlotte Greenfield in WELLINGTON, Wayne Cole and Swati Pandey in SYDNEY; Editing by Gareth Jones and Sam Holmes