DTIs, like LVRs, tighten credit conditions, resulting in some brake on credit and house price inflation. Capital overlays, like LVRs, improve the capacity of banks to absorb losses from mortgage defaults in a downturn. Additional capital requirements might also slow credit growth as banks adjust to higher equity funding. How might these macro-prudential instruments assist in the context of the current housing market imbalances?
The original 2013 LVR restrictions (requiring a maximum 80 percent LVR for most mortgage borrowers) and the Auckland investor LVRs brought in last year (reducing Auckland investor LVRs to a maximum of 70 percent), have had the intended effect of making bank balance sheets more resilient to a potential housing downturn.