New loan rules expected to cut turnover by around 8pc

The impact on house prices will be 'moderate' and wane over time, the bank says in a consultation paper on the policy released yesterday. Photo / Nick Reed

Reserve Bank says reducing house price inflation in Auckland not the only goal.

The Reserve Bank estimates its planned requirement that non-owner occupiers buying residential properties in Auckland have at least a 30 per cent deposit will cut turnover in the market by about 8 per cent over the first year.

That is less than the 13 per cent of property transactions it estimates investor buyers with loan-to-value ratios (LVRs) of more than 70 per cent now represent. It expects some "leakage" as some investors rearrange finances to meet the higher deposit requirements.

The impact on house prices will be "moderate" and wane over time, the bank says in a consultation paper on the policy released yesterday.

"We believe the ultimate effect on Auckland house prices is likely to be in the 2 to 4 per cent range. It is likely that most of this impact would occur in the first six months following policy implementation," it says.

"Over time there is likely to be some reduction in the supply of rental property, in line with a relative shift from investor to owner-occupier purchases. However, this transition will also result in a reduction in demand for rental properties," it says.

Given how large the imbalances in the Auckland housing market are, house price growth is likely to persist in the near term, it says. But reducing the rate of house price inflation in the city is not the only objective.

The other is to improve the resilience of banks' balance sheets to a housing market correction.

Together with the Australian Prudential Regulation Authority, the Reserve Bank ran stress tests of the New Zealand banking system last year which featured a significant housing market downturn, concentrated in the Auckland region, as well as a generalised economic downturn.

"While banks reported generally robust results in these tests, capital ratios fell to within 1 per cent of minimum requirements for the system as a whole," it says.

"Since the scenarios for this test were finalised in early 2014, Auckland house prices have increased by a further 18 per cent. Further, the share of lending going to Auckland is increasing, and a greater share of this lending is going to investors."

The Reserve Bank's assessment is that stress test results would be worse if the exercise was repeated now.

Auckland accounts for around half of the stock of outstanding mortgage lending and more than half the flow of new lending, which is growing at around 25 per cent per annum and which is the most relevant for regulatory purposes as loans are most prone to default in the years immediately after they are taken out.

Investors account for about 40 per cent of Auckland housing market transactions, it says.

"For a typical investor who owns their own home and several others at high LVRs, gearing relative to income (whether including or excluding rental income) will be substantially higher than for a typical owner occupier at the same LVR," it says.

"This means that a substantial fall in house prices would leave the investor much more heavily underwater relative to their labour income." The bank acknowledges that rampant house price inflation is largely an Auckland problem.

It plans to relax somewhat the LVR curbs for owner-occupiers and investors outside the city.

See the Reserve Bank's research here: