Home loan 'speed limits' loom

Reserve Bank Governor Graeme Wheeler announcing the OCR is to remain at 2.5 percent during his press conference in Wellington. Photo / Mark Mitchell

It will be at least August before the Reserve Bank launches its first torpedo at the Auckland property market, in the form of restrictions on low-deposit home loans.

Governor Graeme Wheeler said yesterday that although no decisions had been taken, the bank was seriously considering imposing a speed limit - that is, restricting how much of a bank's new mortgage lending can be at high loan-to-value ratios (LVRs).

It is consulting the banks until early next month.

"We will be looking closely at the feedback over July and I would expect ... to be making judgments after we have looked closely at that feedback."

Wheeler also hosed down hopes, raised by Prime Minister John Key recently, that first-home buyers might be exempted.

At present about 30 per cent of new lending is to borrowers with a deposit of 20 per cent or less, and a similar proportion of new lending is to first-home buyers.

"Carving them out would be a big exemption. So that is why we are looking at speed limits."

Wheeler told MPs on Parliament's finance and expenditure committee he was living in the United States during the sub-prime boom, the bursting of that bubble and the subsequent global financial crisis. After that about a quarter of America's 50 million mortgages were under water - borrowers had negative equity.

The need to avoid anything similar here is the principal reason the bank has sought and been given macro-prudential tools, including the ability to restrict high LVR lending.

The June monetary policy statement forecasts annual house-price inflation nationwide to peak at 10 per cent over the next year or so, from 8.7 per cent now, because house prices and household debt levels are already very high relative to incomes.

That would be notably less than the mid-2000s rises, but it is already exceeded in Auckland and Christchurch.

Wheeler said that during the 2003 to 2007 period the tightening required was 325 basis points.

"Once house price inflation gets away on you and spills over into generalised inflation it becomes very difficult to address it without significant interest rate rises."

But the bank is reluctant to raise rates when the recovery, while strengthening, remains very patchy and when the Kiwi dollar, even with its recent fall, remains overvalued.

The interest rate track pencilled into MPS forecasts has the official cash rate on hold at 2.5 per cent until mid-year next year.

But the dollar's recent fall means the exchange rate is already about 4.5 per cent lower than the forecasts assume for the next 12 months, which all else being equal would permit an earlier start to the tightening cycle.

The forecasts also assume no change to prudential policy settings, as the bank has yet to commit to them. All else being equal, the use of macro-prudential tools would allow the bank to delay the start and reduce the scale of the OCR tightening cycle ahead.

Deputy governor Grant Spencer told the select committee that while those tools which would influence the price of credit (by increasing the cost to banks of making loans) might have an effect equivalent to a 25-basis-point increase in the OCR, the Reserve Bank expected a larger effect from LVR restrictions.

But they were no panacea, Wheeler said, and the bank would have to feel its way with them.