Westpac NZ sparks concern

Westpac Banking Corporation’s (ASX:WBC) New Zealand subsidiary has come under scrutiny, for pushing a product that allows parents to use equity in their home to help their children buy a house.

According to the Australian Financial Review (AFR), New Zealand’s Reserve Bank (RBNZ) may be among the first banks in the world to consider putting a limit on mortgage lending, by imposing a limit on home loan-to-value ratios (LVR). The policy is designed to put a damper on excessive house price growth during periods when credit growth has driven housing demand beyond the supply of available homes.

Auckland’s median house price has climbed around 15% over the past twelve months, due to limited supply and people moving away from the earthquake-affected Christchurch.

Westpac NZ has denied claims that it trying to circumvent the new restrictions, with equity in an existing home being used to lower the LVR on a new loan. But the RBNZ may have made a thinly veiled critisism of Westpac’s new product last week, when the central bank cautioned the nation’s lenders to adhere to the ‘spirit, not just the letter of the restrictions’. RBNZ governor Grant Spencer said, “In particular, they will need to ensure that the policy is not avoided or undermined through innovative lending practices.”

In Australia, the central bank has avoided restricting LVRs in the past, but RBA governor Glenn Stevens has not ruled out adopting macro-prudential measures in future. It may be difficult to enforce in Australia, given the presence of non-bank lenders such as Aussie Home Loans and RAMS, who compete against the big four banks including ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), Westpac and National Australia Bank (ASX:NAB).

Foolish takeaway

Australia could see similar policies put in place, if our housing market becomes overheated. The RBA will be watching the banks and the housing market closely, especially with predictions of more rate cuts to come.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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