October 1 date set for new mortgage rules

Reserve Bank Governor Graeme Wheeler said the LVR restrictions were designed to help slow house price inflation. Photo / Mark Mitchell

Reserve Bank Governor Graeme Wheeler said banks will be subject to restrictions on high loan-to-value ratio (LVR) housing mortgage loans from October 1.

He said banks would be required to restrict new residential mortgage lending at LVRs of over 80 per cent to no more than 10 percent of the dollar value of their new housing lending flows.

He said the LVR restrictions were 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.

In a speech today at Otago University, Wheeler said housing played a critical role in the economy but was also a major source of "value and risk" to the household sector and the banking system.

"The Reserve Bank is concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy," he said.

"Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future," he said.

"This is particularly the case in a market that is already widely considered to be over-valued," he said.

Wheeler said house prices are high by international standards compared to household disposable income and rents.

"Household debt, at 145 per cent of household income, is also high and, despite dipping during the recession, the percentage is rising again,'' he said.

"Furthermore, the growth in house prices is occurring after only a small correction following the house price boom of 2003-2007 that saw New Zealand house prices increase more rapidly than in any other OECD country," he said.

Over the past several months the IMF, OECD, and the three major international rating agencies have pointed to the economic and financial stability risks associated with New Zealand's inflated housing market.

ASB's chief economist Nick Tuffley said the Reserve Bank was continuing to highlight the need for fundamental issues such as the shortage of land and housing to be addressed in the long-term.

"Unfortunately, the supply response of more houses will take years, and the Reserve Bank is left with restraining demand for housing/credit to meet its objective of reducing the financial system risk it perceives from the current house price momentum," Tuffley said.

The new lending restrictions would slow housing market activity over the coming months, although the effects were likely to be modest, he said.

"However, given the persistence of supply and demand imbalances we continue to expect house prices will continue to increase over the next couple of years."

Tuffley said New Zealand interest rates fell following the speech.

To see the full text of Graeme Wheeler's speech to Otago University today, click here.