The Reserve Bank is about to undertake a major review of the capital regime for New Zealand's retail banks, which could potentially have a major impact on the cost of borrowing for houses.
Reserve Bank governor Graeme Wheeler has also said new lending restrictions such as tougher requirements for investors and debt-to-income ratios are being made.
As house prices and mortgage debt surge to levels not seen since the global financial crisis, there have been calls to require banks to hold more capital as a way to limit mortgage lending.
"The issue of risk weights on housing is something that the [Reserve] Bank does think about deeply," Wheeler told the Herald yesterday. "We did move on investor lending last year. We will be having a review of bank capital," he said. "We will be reviewing the capital requirements of NZ banks to ensure they are appropriate in the current environment."
The review is beginning now and will continue well into next year.
"We'll take into account what's been happening in Australia following their Financial Systems Inquiry and we're following closely the Basel Committee for Banking Supervision."
If the review concludes that the banks do need to hold more capital, that could potentially raise the cost of borrowing for housing.
On Thursday the Reserve Bank left interest rates unchanged and dropped further hints about lending restrictions, while three major banks - ANZ, Westpac and BNZ - have introduced their own restrictions on lending to foreign investors.
"You are seeing the banks become more cautious about lending," Wheeler said.
The governor reiterated his concerns about New Zealanders' attitudes to housing investment.
"The general perspective is that house prices are a safe bet, will go up and always will, and I think that is a dangerous set of propositions. If you look at the experience of pretty much all the advanced economies since the 1970s you've seen one or more serious price adjustments."
The average debt households are carrying relative to their annual incomes was now at 162 per cent but was likely to be much higher in Auckland, Wheeler said. "The worrying thing is that back in 1990 that figure was 60 per cent, by 2000 it was 100 per cent. It got up to around 160 per cent in 2007 just before the GFC and it has come back," he said.
"We don't have regional data but I think if [we] did that ratio would be a lot higher in Auckland."
That was because incomes were not significantly higher in Auckland but the cost of buying an average house in Auckland is 9 times the average Auckland income as opposed to just 5.2 times the average income for the rest of the country.
The other worrying factor was debt servicing ratios - the percentage of income required to service a mortgage.
"You can see in Auckland for a new buyer, the ratio got up to around 55 per cent in 2008, it's now up between 45 and 50 per cent - but that's despite the fact that you've got record low mortgage rates."
At the last peak there was an official cash rate of 8.25 per cent and banks' rates were briefly above 10 per cent. Now the OCR is 2.25 per cent and retail rates are close to 4 per cent.
So if the current low interest rates were to change back, you could see just how difficult servicing these mortgages would be, Wheeler said. Examples like the US housing crash were sobering, he said.
"When the crash came in 2009-2010 America had 50 million mortgage holders and 24 per cent of them had negative equity and another 5 per cent had equity of only 5 per cent."