Westpac NZ sparks concern

New home loan product under watch from New Zealand's Reserve Bank

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 19, 2013 11:27 am AEST

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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