WELLINGTON, Sept 30 (Reuters) - 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 sharp downturn.
“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 monetary statement.
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.
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