Ross put it to Wheeler that LVR restrictions had been almost too effective.
Wheeler responded by reminding the MPs of the backdrop to the decision to introduce the curbs last year.
New Zealand had experienced the strongest rate of house price inflation in the OECD between 2003 and 2008 but unlike many other advanced economies prices had not come back much in the global financial crisis.
"House prices started taking off again, partly because of housing shortages and partly because in order to try to get the economy into recovery mode we had cut interest rates to the lowest level in 50 years. And we knew that was not going to just be an Auckland and Christchurch thing. We knew house prices would start increasing significantly around other parts of the country and indeed that is the case."
Household debt was starting to build up again from an already high 140 per cent of household disposable incomes.
"So we faced the situation of how to restrain banks' lending behaviour when over 30 per cent of bank lending was taking place to people who had low deposits and that was providing further stimulus to house price appreciation," Wheeler said.
The economy was growing at around 1.5 to 2 per cent, the exchange rate was strong and the inflation rate just 0.7 per cent.
The bank could not raise interest rates at that time.
"We had been trying to stimulate the recovery, after all, and inflation pressures were low. So LVRs were put in place and by and large have worked very well."
But it had been "interesting" to see how quickly the banks had reduced lending to people with low deposits, Wheeler said.
See the Financial Stability Report here:
Deputy governor Grant Spencer said that with the banks now accustomed to the new system he expected to see the proportion of new lending on high LVRs rise to around 8 per cent. The earliest date for beginning to remove the LVR restrictions was likely to be late this year, he said.
The bank was keeping its options open about how and when the removal of LVRs would be done but it was quite possible they would be phased out – most likely by raising the "speed limit" from 10 per cent of new mortgage lending to some higher number – rather than removed in one hit.
The financial stability report says a key condition for their removal is "sustained moderation" in house price inflation.
House prices and household debt should be rising in line with growth in aggregate household incomes, it says.
That would suggest a rate around 5 or 6 per cent. Mortgage credit growth, at least, is already in that zone.
Another indicator would be progress towards meeting the physical shortage of housing, which the bank estimates is around 50,000 in Auckland and Christchurch alone.
The report repeated Spencer's comment last week that the bank would need to be confident the unexpectedly strong surge in net immigration – which is largely driven by fewer Kiwis leaving the country and more returning – would not cause a resurgence of house price inflation.
