New Zealand’s Reserve Bank will limit how much banks can lend to homebuyers with small deposits, in a bid to slow the growth of house prices in the country.
The new restrictions will come into effect on October 1 and apply to mortgages where the loan is more than 80% of what the house is worth.
Banks will be asked to limit their high loan-to-value ratio (LVR) mortgages to 10% of the housing loans they issue.
RBNZ governor Graeme Wheeler explained that the central bank, IMF, OECD and three rating agencies had separately warned that house prices were rising too quickly.
Here’s what he said:
Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future.
This is particularly the case in a market that is already widely considered to be over-valued.
House prices are high by international standards when compared to household disposable income and rents.
Household debt, at 145 percent of household income, is also high and, despite dipping during the recession, the percentage is rising again.
Furthermore, the growth in house prices is occurring after only a small correction following the house price boom of 2003-2007 that saw New Zealand house prices increase more rapidly than in any other OECD country.
The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.
Wheeler noted that RBNZ could have attempted to dampen the housing market by increasing the official cash rate from the current low of 2.5% – and consequently mortgage rates, but that would have had the unwanted side effect of boosting the New Zealand dollar.
The LVR restrictions would remain in place until there was “evidence of a better balance in the housing market”, he said.
The Reserve Bank’s official statement on the new restrictions is here.
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