NZ to limit low-deposit home loans to just 10pc

The central bank steps in to put the brakes on what it fears may become a housing bubble, writes Tracy Withers.

New Zealand's central bank will impose restrictions on low-deposit home lending to guard the financial system from a bubble that has made houses in the country the fourth most overvalued in the world.

Loans for more than 80 per cent of a property's value must account for no more than 10 per cent of a bank's new lending, from about 30 per cent now, the Reserve Bank of New Zealand said on Tuesday. The New Zealand dollar declined after bank governor Graeme Wheeler said the kiwi was "overvalued relative to what would be sustainable long-term".

Mr Wheeler wants to curb the excesses of the property market. He is concerned that the banking system is getting overexposed to any sudden collapse in house prices, but he has been reluctant to raise interest rates because that might stoke demand for the New Zealand dollar, hurting exports and hindering an economic recovery.

"If they were to whack up interest rates right now, when rates are still so low elsewhere, there is that risk that the currency gets pushed up further," said Nick Tuffley, chief economist at ASB Bank in Auckland. "They will be hoping these restrictions have an impact on house prices and reduce the need to put rates up."

The central bank has held the official cash rate at a record-low 2.5 per cent since March 2011. On July 25 Mr Wheeler said the RBNZ expected to keep it unchanged through to the end of 2013.

"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," he said.

"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."

Mr Wheeler said as much as 30 per cent of new loans were being made with loan-to-valuation ratios of more than 80 per cent, up from 23 per cent in late 2011.

The Organisation for Economic Co-operation and Development said in May that New Zealand's homes were the fourth-most-overvalued in the developed world, behind only Belgium, Norway and Canada. Prices rose 8.1 per cent in July from a year earlier, the fastest pace since January 2008, according to Quotable Value New Zealand, a government research company.

The central bank expected home-loan restrictions to curb house-price growth, reducing the risk of a slump in values that would damage the financial system and the economy, Mr Wheeler said.

Allowing for exemptions, including bridging loans, refinancing of existing loans and lending under a government plan for low-income earners, the effective limit on lending with a high loan-to-valuation ratio was 15 per cent, he said.

The measures were temporary and would eventually be removed "if there is evidence of a better balance in the housing market".

If they were not effective, they would be removed "but in this case their removal might necessitate higher interest rates than otherwise" or the use of other prudential tools, he said.

Mr Wheeler has an agreement with Finance Minister Bill English to also use tools that require banks to hold additional capital or increased funding from long-term sources. He selected loan restrictions because they could dampen asset prices more directly, he said.

New Zealand joins nations such as Sweden and Canada in imposing loan limits. In Canada, house prices across 11 cities rose 1.8 per cent in June from a year ago, the slowest since October 2009, after in June 2012 it reduced the amount home owners could borrow against the value of their property.

Still, in Sweden, which in October 2010 capped mortgages at 85 per cent of a property's value, apartment prices jumped 11 per cent in the 12 months through June compared with a 3 per cent gain the previous year, according to Svensk Maklarstatistik.

In New Zealand, the proposals have raised concerns that first home buyers may struggle to raise a 20 per cent deposit and be shut out of the market. Government-owned Kiwibank said it would give priority to those buyers over people seeking investment properties.

Mr Wheeler urged that priority be given to increasing housing supply.

Supply constraints have been driving price increases in the country's biggest city, Auckland.

More building and limits on lending would help reduce the risk of a house-price boom, Mr Wheeler said.