The Reserve Bank's plan to restrict the number of low equity mortgages will hobble first home buyers while helping property investors, ensuring house prices keep marching higher, according to Westpac Bank economists.
The central bank, concerned about spiralling house prices causing financial instability, is expected to bring in new loan-to-value ratio tools to force lenders to limit low equity borrowing as early as this month. The bank may say only 12 per cent of new mortgages can be given to borrowers whose deposits amount to less than 20 per cent of the loan, Westpac economists said in a note.
The restrictions will probably spur trading banks to raise interest rates for low-equity borrowers as banks seek to ration high debt lending through price, Westpac said. Conversely, those with high equity may enjoy lower mortgage rates because banks will compete more fiercely for those customers that they are allowed to lend to, Westpac said.
"Some first home buyers will be excluded from the market by the higher mortgage rates they face.
These people will rent instead," Westpac economists said.
"Investors normally have higher equity stakes in their portfolios, so they will be among the people enjoying discount mortgage rates," Westpac said. "Investors will also experience greater demand for rental accommodation and less competition from first home buyers at auction. The LVR restrictions could create great conditions for property investment".
"Although LVR restrictions will severely dent first home buyer demand, we suspect that ongoing investor demand will ensure house prices continue their upward march."
Westpac expects the restrictions to slow the rate of house price growth "only a little", and has pulled back its expectations for house price gains by 1.5 percentage points over the next two years combined.
The bank expects house prices will continue rising until mortgage rates go up for everybody, the economists said.
Traders are pricing in 71 basis points of hikes to New Zealand's benchmark interest rate in the next 12 months, according to the Overnight Swap Curve.
The central bank has said the restrictions will only work if the trading banks don't undermine the regime. Westpac this week began marketing the way potential house buyers can use equity in immediate family members' homes as security against a mortgage, reducing the loan-to-value ratio.