Tuesday 19th July 2016 |
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The Reserve Bank plans to roll-out tougher lending restrictions across the nation from September in an effort to mitigate the risk the country's rapid house price growth poses to the wider financial system.
The central bank wants to cap bank lending to property investors with a deposit of less than 40 percent at 5 percent and restore the 10 percent limit for owner-occupiers wanting to take out a mortgage with a deposit of less than 20 percent, according to a consultation paper released today. The property investor loan-to-value ratio restriction is an extension of the existing restraint in Auckland, which has a lower deposit threshold of 30 percent. Existing exemptions, such as loans for new dwellings, would stay in place.
"LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks' exposure to riskier mortgages," governor Graeme Wheeler said. "This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand."
Earlier this month the Reserve Bank signalled new restrictions could be in place before the end of the year as it balances the strength of the New Zealand dollar in keeping imported inflation subdued against low interest rates stoking demand for housing.
The bank will give an unscheduled economic update on Thursday, which investors are predicting will see Wheeler try to talk the kiwi down and perhaps pave the way for a rate cut next month. The kiwi dollar dropped to 75.52 US cents from 76.03 cents immediately before the release.
The central bank is seeking feedback on the proposed measures, with the consultation set to close on Aug. 10.
It anticipates the extension of the LVR restrictions will reduce house price inflation by 2 percent to 5 percent, and cut sales by 5 percent to 15 percent.
The Reserve Bank is still considering introducing a debt-to-income (DTI) ratio, which the consultation paper says would be complementary to the LVR restriction "by further mitigating housing credit risk", and is also looking at tougher capital requirements for lenders.
"Although the Reserve Bank will continue to investigate the case for using a DTI restriction and/or a capital overlay in the future, the increasing over-valuation in the housing market and rapid increases in investor debt suggests it is desirable to change the LVR policy in the interim," the paper said.
Wheeler said his early discussions with Finance Minister Bill English on the DTI limits had been "positive".
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