WELLINGTON, Sept 30 New Zealand's central bank
takes a step into the dark on Tuesday when new rules to limit
risky house lending come into effect, although many economists
doubt they will work.
Meanwhile, struggling first home buyers look like they have
become the first casualties.
From Oct 1, banks have to keep lending to borrowers with
mortgages of less than 20 percent of a property's value -- the
so-called high loan-to-value ratio lending (LVR) -- to no more
than 10 percent of their total lending.
The Reserve Bank of New Zealand had been flagging for the
past year its concern about the risks of an overheated housing
market, particularly in the biggest city Auckland, and the risk
that posed to the country's financial system if there should be
"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," said RBNZ Governor Graeme Wheeler in the Sept 12
By his own admission, Wheeler does not know if the measure
will work and what impact it might have, although he has said
the bank does not want to cool the housing market by raising its
official cash rate because it might fuel buying of an already
elevated New Zealand dollar.
Median house prices were at a record in August, having risen
9.5 percent over the year, but in the biggest city, Auckland,
where supply is heavily constrained, prices rose 17.9 percent.
To some observers the RBNZ's move is more like a policy stab
in the dark, to cool a moderate housing market with two hot
spots -- Auckland and earthquake-damaged Christchurch.
"The Reserve Bank of New Zealand has moved into the realms
of experimentation with its macro-prudential prescription," said
Stephen Toplis, the Bank of New Zealand's head of research.
The new rules, which apply only to retail banks, do not ban
lending to home buyers with less than a 20 percent deposit. But
banks, which had as much as 60 percent of new mortgages in such
loans, have all but turned off the tap, and are charging a
higher rate of interest compared to those with big deposits.
OVERSEAS EXPERIENCE MIXED
The LVR restrictions are untried in New Zealand, but have
been used in several countries, including South Korea,
Switzerland, Canada, Israel, and Sweden, with mixed results.
Westpac Bank economists surveyed the offshore experience,
which shows fewer house sales, and price growth slowing and in
some cases falling, but only for a limited period.
"The impact is likely to be quite modest, relatively brief,
and less effective than moving interest rates would have been,"
said Westpac senior economist Michael Gordon.
"In the end, we think house prices will rise to much the
same levels as they would have done without the new rules."
Gordon also expects that banks will now compete more
vigorously for the higher deposit lending, which paradoxically
may stoke housing demand.
The banks have already slowed the level of low deposit
mortgages to a trickle and have also started charging higher
interest rates on such loans, with the margin ranging between 25
and 40 basis points.
An extra requirement for the top four banks, which has also
come into effect, is that they have also had to increase the
amount of capital to back LVRs.
The RBNZ has warned banks not to try and get around the new
rules, but already there are anecdotes of borrowers unable to
amass a big enough deposit, chasing money from parents, using
credit cards, or heading to more expensive non-bank lenders.
"By pushing people into the unsecured lending market you're
not doing what you aim to, which is cooling demand, and if
financial stability is the objective driving people into the
unsecured lending is not the best way of that," said the chief
executive of the Bankers' Association, Kirk Hope.
(Reporting by Gyles Beckford; Editing by Kim Coghill)