WELLINGTON New Zealand's central bank on Tuesday moved to rein in a hot housing market to prevent a potential bubble, imposing its long-threatened limits on low deposit-high value house loans and sending the currency tumbling more than a third of a cent.
Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler said from Oct 1 banks would be limited to no more than 10 percent of their total new house lending on mortgages exceeding 80 percent of the value of the property.
He said the restrictions on the amount of high loan-to-value ratio lending (LVR) was its most effective macro-prudential tools in controlling the housing market.
"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," Wheeler said in a speech.
The restrictions were not unexpected and the RBNZ has been voicing its concern since the end of last year about the rapid growth in house prices and the inflation threat it posed.
Industry and government data have show median prices at record levels, driven largely by growth in the biggest city Auckland and earthquake damaged Christchurch, where demand exceeds supply. Median house prices rose 8.6 percent in the 12 months to July, according to industry data.
Still, Wheeler said the RBNZ was reluctant to use its official cash rate (OCR) to try to cool the market.
"However, 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..any OCR increases in the near term would risk causing the New Zealand dollar to appreciate sharply," he said.
The comments saw the New Zealand dollar fall to a low of $0.7979 from around $0.8020. The 2-year swap rates fell 10 basis points to 3.45 percent.
Wheeler renewed the RBNZ's warning to banks not to circumvent the measures, with new types of loan packages.
However, analysts were skeptical the measures will have much lasting effect after the "initial sticker shock", which might see prices fall and demand slow.
"We suspect that, over time, house prices would be bid up to much the same levels as they would in the absence of LVR restrictions - perhaps at a slower pace, with fewer competing bidders, but ultimately reaching a similar end-point," said Westpac chief economist Dominic Stephens.
The growth in housing credit was 5.4 percent in the year to June, more than double the growth rate a year earlier.
(Reporting by Gyles Beckford; Editing by Shri Navaratnam)