Long awaited restrictions on low deposit home loans were unveiled by Reserve Bank governor Graeme Wheeler today.
The restrictions will take effect from October 1: banks will be required to restrict new residential mortgage lending at LVRs of over 80 percent to no more than 10 percent of the dollar value of their new housing lending flows.
These loan to value ratio restrictions have been long signalled by the central bank: the main question has always been the timing and whether or not they would - as politicians from within the government and the oppostion have urged - have some sort of exemption for first home buyers.
As this group is by far the main group of low deposit borrowers the Reserve Bank has resisted this pressure.
"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," Mr Wheeler said in a speech to Otago University this afternoon.
“The conventional mechanism to help restrain housing demand, while working on the supply response, would be to raise the Official Cash Rate (OCR), which would feed through directly into higher mortgage rates.
“However, while higher policy rates may well be needed next year, as expanding domestic demand starts to generate overall inflation pressures, this is not the case at present. CPI inflation currently remains below our 1-3% inflation target. Furthermore, with policy rates remaining very low in the major economies, and falling in Australia, any OCR increases in the near term would risk causing the New Zealand dollar to appreciate sharply, putting further pressure on New Zealand’s export and import competing industries.
“In the current situation, where escalating house prices are presenting a threat to financial stability but not yet to general inflation, macro-prudential policy offers the most appropriate response."
The restrictions will remain for an undetermined peroid: how long they will last depends on their effectiveness, Mr Wheeler says.
"LVR limits will be removed if there is evidence of a better balance in the housing market and we are confident that their removal would not lead to a resurgence of housing credit and demand.
“It is critical that priority be given to implementing measures needed to relieve the shortage of housing and land supply, which is the dominant cause of the increase in house prices in Auckland and Christchurch. But the LVR restrictions have a useful role to play alongside the supply measures.”