The introduction by the Reserve Bank of tighter loan-to-value ratios (LVRs) on October 1 will go some way towards taking the heat out of the real estate market, but the "elephant in the room" remains the light-handed tax treatment given to property, KMPG partner John Kensington says.
Low deposit loans were likely to have played a part in the current buoyant property market, but the fact that property remained a largely "no go" area for tax was also likely to have been a factor. "I think the two are linked," he said.
"If the Government had announced a month ago that that's what they would do (tax property), effective today, the (Reserve Bank) Governor Graeme Wheeler would not have had to do what he did," he said.
Wheeler announced that from October 1, banks would be subject to restrictions on high LVR housing mortgage loans.
From that date, banks will be required to restrict new residential mortgage lending at LVRs of over 80 per cent to no more than 10 per cent of the value of their new housing lending flows.
Banking experts said the move would go some way towards cooling off what has been a very strong real estate market, but that it would not be enough by itself to stop the trend dead in its tracks.
Kensington said the tax treatment afforded to property remained the elephant in the room in the property debate.
"My belief is that most people probably agree that it needs to be done," he said.
"It's just that it is not palatable and they don't want it done to them," said Kensington, who edits KPMG's Financial Institutions Performance Survey.
Tighter LVRs would most likely mean both lenders and borrowers would become more inventive to achieve their aims.
They could also mean the resurgence of non-bank deposit takers (NBDTs), such as finance companies, banking experts said. Lenders were also likely to develop cross-collateralised products - formalising a type of lending that has already been commonplace.
In July, Westpac introduced a facility to allow prospective home owners to borrow against the equity in the property of an immediate family member, or their savings, to reach the required deposit.
Kensington said LVRs would add "focus" to the lending sector.
"Everybody in the current market is looking for a lending opportunity because people are competing for it hard," he said.
"To me, there is opportunity for lenders to be inventive and come up with product, if they are prepared to take the extra risk," he said.
Kensington welcomed the Reserve Bank's policy on LVRs. "Anything that encourages more responsible lending for the banks ... is good," he said.
Lachlan Colquhoun, head of markets analysis at East & Partners in Sydney, pointed to the almost complete collapse of the finance company sector over 2007-09 and said there was no doubt the new policy would open the door again for such non-bank lenders.
"Those moves from the Reserve Bank are going to create greater demand for non-bank lending and that, as far as we can see, has been a can of worms," Colquhoun said.
But Sam Shuttleworth, banking specialist at PwC, said the Reserve Bank firmly regulates NBDTs in New Zealand after the finance company meltdown, which cost the taxpayer and investors several billion dollars.
"There are definite hurdles that they (NBDTs) must satisfy to minimise the risk of the experiences that we have had with them in the past," Shuttleworth said.
Simon O'Connor, managing partner at Ernst and Young in Auckland, said tighter LVR rules were a step in the right direction.
"I don't think it will take the heat out of the property market that people would hope for, but it's going to reduce it," he said.
On the broader issues, he said there remained the "spectre" of a capital gains tax at some stage in the future, and there was "no certainty" that it would not be backdated.
Little effect on bank profits
Bank profits are likely to suffer only a small negative impact from restrictions on low equity lending say banking experts.
Daniel Yu, an analyst with rating agency Moody's, said it was hard to know exactly how banks would respond to the Reserve Bank's new 10 per cent cap on new home lending to borrowers with less than 20 per cent equity.
"I can see several ways to reduce the amount of high LVR [loan to value ratio] lending - they could could simply write less business, or differentiate by price or by picking by the quality of the borrower. From a profitability point of view there might be a marginal negative."
But Yu said banks could also counter lower volumes of lending by increasing their margins and charging higher interest rates on low equity loans.
Yu said the Reserve Bank had indicated banks had been relaxed in charging that premium.
"We could expect to see more of the banks bringing that back which could reduce the profitability impact."
From a credit rating perspective Yu viewed the October 1 change as a positive as it would improve the asset quality of the banks.
Massey University banking expert David Tripe said there could be a short-term negative impact on the banks but a positive longer-term impact because of the potential for a reduction in bad debts.
But he warned that trying to slow housing price growth in Auckland and Christchurch could have negative flow-on effects in other areas.