KEY POINTS:
The Reserve Bank's latest plan to tackle the housing boom will take aim at riskier mortgages by fast-tracking new rules on how much cash banks must hold to back their home loans.
But economists say the measures, which would make low or no-deposit loans more expensive, will have
little effect.
The plan was revealed in the bank's six-monthly Financial Stability Report, in which it said New Zealand's overall financial health was stable and the sector was performing well.
However, the bank once again pointed to "significant economic imbalances" including the continuing housing boom and record level of household debt which was funded mainly from overseas, via domestic banks.
Governor Alan Bollard and his deputy, Grant Spencer, made it clear the bank expected the housing market to go through some kind of "correction" at some point - probably a gradual decline in "real" house prices as sale prices failed to keep up with inflation, as occurred in the late 1970s, rather than a "nominal" decline, where actual sale prices fall.
But the bank remains concerned that the longer the current housing boom lasts, the sharper the correction will be.
Bollard has in recent months suggested the bank may use more stringent capital adequacy ratios, effectively increasing the cash reserves banks are required to hold, in order to rein in growth in credit and therefore the housing market.
Yesterday, the Reserve Bank said that aim could be achieved via the new international "Basel II" capital adequacy rules.
Under the rules, banks will be required to hold lower reserves on average, but will be forced to hold bigger reserves to back loans in excess of 80 per cent of the value of the property.
The cost of maintaining those higher reserves would flow through to borrowers, making the loans less affordable and thereby reducing demand.
Spencer said the bank had become increasing concerned with the strong recent growth of comparatively risky high "LVR" (loan to value ratio) loans which require little or no deposit.
While Basel II is scheduled to be introduced to New Zealand in January next year, Bollard said the bank had been considering "whether the current framework should be modified in this direction" before then.
However, he said the bank would prefer to see "a moderation and gradual adjustment in the housing market" rather than resorting to a regulatory fix.
But Deutsche Bank economist Darren Gibbs believed the bank was probably attempting to "jawbone" banks into curbing high LVR lending rather than seriously considering adopting the rules six months earlier than planned.
"Given that most banks hold excess capital in any case, even if every loan here for the next six months was high LVR, I can't see how it would make any difference.
"I wonder whether or not again it's just a matter of signalling, being seen to be on the job and trying to send strong messages to lenders and borrowers, as opposed to actually thinking it might make a difference directly."
Bank of New Zealand economist Mark Walton saw little difference between implementing the changes now or waiting until January.
"The indications are that there's a fair bit of momentum in the market and changes such as these are likely to have, at least in the short run, a fairly small impact."
Meanwhile, Bollard said some of the bank's concerns about the growth in housing credit had eased slightly in recent weeks as banks increased the margins they earned on fixed-term mortgages.
The bank believes the contraction of those margins due to price competition has been fuelling the housing market to some extent as well as potentially weakening banks' balance sheets.
But he sidestepped a question about how much the change was attributable to the recent round of discussions he'd had with bank chief executives.
Risk Management
* The Reserve Bank is taking aim at low or no-deposit home loans in order to slow the housing market and maintain financial stability
* By fast-tracking new international rules forcing banks to hold more cash in reserve to back high "LVR" (loan to value ratio) mortgages, those loans would become more expensive to service.
* But economists doubt that the early introduction of the rules, which would come into effect anyway in January, will make much difference to the housing market.
