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The Reserve Bank won't start lifting restrictions on home loans with small deposits any earlier than late in the year, with the limits cooling demand in the country's housing market, deputy governor Grant Spencer says.
The restrictions have slowed house price inflation by about 2.5 percentage points and strengthened banks' balance sheets by reducing the level of high loan-to-value ratio loans on their books, Spencer said in a speech to the Admirals' Breakfast Club in Auckland.
"Before removing the LVRs, however, we will want to be confident that the housing market is responding to interest rate increases, and that immigration pressures are not causing a resurgence of house price pressures," Spencer said. "At this stage we consider the earliest date for beginning to remove LVRs is likely to be late in the year."
In October, the central bank limited the level of new home loans banks could write with deposits of less than a fifth of a property's value to 10 percent, with some exceptions. At the time, almost a third of new loans banks were making were at the riskier level, and since the limits were imposed the share of high-LVR lending has reduced to just 5.6 percent.
Governor Graeme Wheeler embarked on the programme as a means to slow down accelerating demand in the housing market without having to resort to raising interest rates, which could have pushed up an already elevated currency.
Wheeler has since kicked off a tightening cycle to head off looming inflation pressures, raising the official cash rate twice to 3 percent, and the bank projects the rate will increase to near 5 percent by the end of next year.
Spencer today said the future path of interest rate hikes is still uncertain, largely due to the strength of the kiwi dollar.
"A big uncertainty is the future path of the exchange rate, which has a major bearing on traded goods prices and overall economic activity," Spencer said. "The more downward pressure that the exchange rate exerts on prices and activity, the less pressure will need to be exerted by interest rates."
Housing is the other major uncertainty, though Spencer said the bank anticipates a greater impact from interest rate hikes than the 2003 to 2007 housing boom, with more mortgages currently on floating or short-term fixed rates.
"This means that OCR increases will be felt more immediately by existing as well as new mortgages," he said.
The Reserve Bank is more comfortable about private lenders' balance sheets as a result of the LVR restrictions as it reduces their vulnerability to a slump in house prices.
Still, with about 20 percent of banks' mortgage books in high LVR loans, Spencer said rising interest rates will push up the cost of servicing that debt, meaning some borrowers and lenders could face some stress in the coming two years.
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