Reserve Banks stems credit to avert New Zealand housing bubble risks
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E-mail Xinhua, August 20, 2013
New Zealand's central bank is to impose strict new mortgage lending limits on banks in a bid to head off risks to the economy caused by soaring home prices, particularly in the two largest cities of Auckland and Christchurch.
Reserve Bank of New Zealand Governor Graeme Wheeler said on Tuesday that from Oct. 1 only 10 percent of a bank's new mortgage lending value would be allowed to be issued in mortgages of more than 80 percent of a home's value.
The loan-to-value ratio (LVR) of 80 percent means that most home buyers will need to raise a deposit of 20 percent.
"Housing plays a critical role in our economy. It represents almost three quarters of household assets, and mortgage credit accounts for over half of banking system lending. Housing is a major source of value and of risk to the household sector and the banking system," Wheeler said in a published speech at Otago University in Dunedin.
"The Reserve Bank is concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy."
New Zealand home prices were high by international standards when compared to household disposable income and rents.
Household debt, at 145 percent of household income, was also high and rising, despite dipping during the recession.
In recent months the International Monetary Fund, Organization for Economic Cooperation and Development, and the three major international rating agencies had pointed to the economic and financial stability risks associated with New Zealand's inflated housing market, he said.
"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."
The restriction would also ease pressure to raise interest rates, currently sitting at an historic low of 2.5 percent, which would cause the dollar to rise sharply and harm exporters, he said.
The LVR restrictions would remain until the bank had evidence of a better balance in the housing market and was confident that their removal would not lead to a resurgence of housing credit and demand, he said.
Opposition parties said the move would lock many first-home buyers out of the market, and they have called for a capital gains tax on property to discourage speculators. Endi
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