The Reserve Bank's prospective new toolkit to iron out asset bubbles won't be able to stop a rampant Auckland housing market when it comes into play later this year, and would have a smaller impact than a rate hike.
Deputy Governor Grant Spencer told Parliament's finance and expenditure committee the macro-prudential tools currently being consulted on won't stop Auckland's "housing market dead". Rather they will slow the bubble down and will need to work with a natural downturn in the market.
The capital overlay and core funding ratio tools will affect lenders' cost of funding by between 10 basis points and 20 basis points, less than a hike in the official cash rate, he said. Imposing a loan to value ratio would be more likely to have a significant impact as it affects quantity of credit.
"You're still requiring for house prices to turn eventually as a result of more fundamental cyclical factors," Spencer said.
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The central bank is expected to sign a memorandum with Finance Minister Bill English and the Treasury in the middle of the year governing how it would use the tools.
The Reserve Bank has come under increasing pressure to roll out the new tools with Auckland's property market bubbling away amid a lack of listings and growing demand.
Local property prices rose 7.6 per cent last month on increasing sales numbers, according to Real Estate Institute figures. New Zealand's property market gains have been driven by a lack of supply in its biggest city, Auckland, and as the Canterbury rebuild gets underway.
The Reserve Bank estimates house prices increased in real terms at an annual pace of 6 per cent last year, and will rise 6.2 per cent and 3.6 per cent respectively this year and next.
In recent months, banks have been writing bigger mortgages as a ratio to the value of property, and about 20 per cent of the nation's $180 billion in residential mortgages were written at loan-to-value ratio of more than 80 per cent, and 10 per cent above 90 per cent.
Governor Graeme Wheeler told politicians the last thing the country needs is a property bubble that gets out of control, and that's why he has moved quickly with the new tool-set.