First-home buyers looking to take advantage of low interest rates to get onto the property ladder are likely to be less exposed to stricter lending conditions, a local economist says.
The Reserve Bank announced on Thursday that major New Zealand banks must increase their cash reserves from a minimum of 10.5 percent, to 18 percent (16 percent for smaller banks), giving them seven years from July 2020 to raise around $20b between them.
Speaking to The AM Show on Friday, Christina Leung, principal economist from New Zealand Institute of Economic Research (NZIER), said that the upshot of requiring bigger vaults is that banks will be more cautious about who they lend to and what the risks are.
However, it's more likely that borrowers within the agricultural and corporate sectors will be caught short than residential borrowers.
"As The Reserve Bank has highlighted, [the concerns are] the indebtedness of the agricultural sector - and they've been keen to highlight that it's a particular segment where the debt is concentrated, it's not across all farmers - where banks should be more careful," Leung said.
Given the risk weights (the probability of defaulting on a loan) attached to each type of lending, agriculture and corporate loans are perceived to have more risk attached to them.
"Whilst the Reserve Bank has been keen to highlight that it is up to the banks how they decide on the mix of lending that they do, with the risk weights attached to those particular types of lending, if anything, it could make the banks gear more towards residential lending.
"The fact that with a mortgage, there's a house - an intrinsic value - attached to it (underlying collateral), it does tend to make it a safer form of lending for banks," Leung added.
In a Kiwibank markets update on Friday, Jarrod Kerr, chief economist at Kiwibank, said that although more capital is required by all banks, the decisions are less onerous than originally proposed.
Demand for agricultural loans is expected to increase, at a time when the expected supply is sharply reducing. Tightening of lending for commercial property, SME's and institutions is also expected, but home-buyers aren't likely to be affected.
"The observed supply of agri loans has contracted over the last six months, and the expected availability of agri loans is down even further.
"Credit availability is well below the average experience of the last 3- years.
"Lending to residential (mortgages) remains relatively unscathed...and we think the supply of residential mortgage lending will remain relatively unscathed.
"Mortgages have the lowest risk weighting," Kerr said.
Kerr said that what's more important than the bank capital regulations is the Government fiscal policy announcement, expected next week.
"The Government is gearing us up for alot more spending - hopefully on infrastruture and education, [which will] cause economists to revise [the economic] outlook.
"If they do finally decide that now is the time, forecasts will be revised higher: growth, inflation [and] wages.
"It will be a better outlook if the Government steps up to the plate," Kerr said.
With seven years up their sleeve to conform to capital requirements, one of the early triggers banks have to conform is to deploy lending conditions that reflect risk weightings, with the agricultural and corporate sectors likely to be the most impacted.
As the typically busy property season of February and March looms ahead, for first home buyers looking to take advantage of low interest rates, the window of opportunity to borrow cheaply isn't about to be taken away.
