The Reserve Bank is considering tighter mortgage lending restrictions, and could impose them within months, reports Tony Verdon.

Reserve Bank Governor Graeme Wheeler has little choice but to impose further restrictions to contain Auckland's soaring house prices.

The central bank is likely to introduce income-related lending restrictions to try to avoid financial grief in the event of a sharp downturn in housing prices.

Although the downturn is unlikely to occur in Auckland in the next 12 to 18 months, economists say there will eventually be a downturn, even in our largest city.

The impact of the Reserve Bank's loan to value ratio restrictions imposed 18 months ago is beginning to wane, especially in the Auckland marketplace.


The Governor, in turn, is unable to raise the Official Cash Rate for fear of attracting even more foreign capital into the country, and inflating prices even further. With immigration continuing at unprecedented levels, and the number of newly built houses only just beginning to ramp up, Auckland's shortage of homes will continue to underpin price increases.

Yet again, Graeme Wheeler and his central banking colleagues are faced with the dilemma presented by modest price increases in houses everywhere else in the country except Auckland.

The dilemma is starkly illustrated in today's Quotable Value figures, which reveal prices continue to increase not only in central Auckland, but also in the outskirts of the city. For example, the median price of a home in Helensville increased by 51.9 per cent in the three years to the end of 2014.

Values in outer suburbs, such as Kelston (up 64.2 per cent), Glen Innes (up 93 per cent), Glendowie (up 77.5 per cent), Panmure (up 71.5 per cent) and Point England (up 83.8 per cent) have also soared in the last three years.

But the real dilemma facing central bankers and politicians is the increasing value gap between suburbs across Auckland, and house values in many of the regions.

In Dargaville, for instance, the median price fell 13.9 per cent during the three years to the end of 2014.

Graeme Wheeler. Photo / Mark Mitchell
Graeme Wheeler. Photo / Mark Mitchell

In smaller regional towns, such as Putaruru, values fell by 15.6 per cent, Tokoroa by 19.3 per cent, Kawerau by 29.8 per cent, Flaxmere by 24.7 per cent and Whanganui East by 20.7 per cent.

Values also fell during the three years in Wellington Central by 41.3 per cent. Other suburbs in the capital, which also suffered decline included Wilton (minus 27 per cent) and Northland, (minus 28 per cent).


While many factors are contributing to the divergence in values, bankers themselves are starting to express concerns about the sustainability of Auckland values.

Like other players in the Auckland housing market, bankers say the real problem is a lack of supply, something the Government and Auckland Council are trying to address, but to which there is no immediate solution.

The building industry is ramping up the building rate, but bankers for one group believe Auckland prices will continue to increase in the immediate future.

With inflation continuing to be weaker than expected, historically low interest rates, high immigration numbers and continuing strong economic growth, the prospects for further house price inflation in Auckland are high.

Following the introduction of the loan to value ratios in October 2014, banks have been reigning in lending to those with low deposits.

But economists and bankers believe the Reserve Bank must impose tighter income-related lending restrictions to avoid borrowers overstretching to enter the Auckland housing market.

Banks could be compelled to only provide mortgages to those whose incomes meet a set criteria, for example, three times the borrower's annual income.

Graeme Wheeler was working with the International Monetary Fund in Washington during the height of the global financial crisis, and witnessed first-hand the personal misery many borrowers found themselves in when values fell sharply.

He introduced the loan to value ratio restrictions with the aim of avoiding such personal financial calamity, and to strengthen the banking system by reducing bank exposure to high-risk mortgage lending.

The Institute of Economic Research praised the Bank of England's move last year to restrict high loan to income residential mortgages.

The UK central bank ruled that no more than 15 per cent of banks' new mortgages should be loans of more than 4.5 times a borrower's annual income.

The restrictions specifically address the issue of households' long-term ability to service debt, whereas New Zealand's LVR restrictions address this issue only indirectly.

Last month, the Irish Central Bank also signalled a package that combines loan to value ratio limits and loan to income ratios, partly in response to a 16.2 per cent increase in Irish house prices during 2014.

A loan to income ratio would be a logical extension of the current LVR restrictions in this country, although any further restrictions would be particularly unpopular in regions outside Auckland.

Once again, those involved in real estate in the regions would say their markets are being punished because of a problem unique to the Auckland housing market.

The only consolation for those in the regional housing markets is that their house prices tend to be more affordable, and so the income-related restrictions would have less impact.

House prices in most regional towns have been relatively subdued during the last three or four years when Auckland prices have been increasing in double figures.

Regional cities such as Tauranga and Hamilton are finally enjoying some growth but there is no suggestion of prices escalating at anywhere near the levels they are in Auckland.

Bankers in this country say they already take into account a borrower's ability to service a mortgage, and that any limit would be arbitrary.

Arbitrary it may be, but the Reserve Bank has to do something other than stand by and watch prices in Auckland become even more unsustainable than they are at the moment.

If the bank does decide to impose further restrictions, it would have to give players in the industry reasonable notice -- it gave the banking industry six weeks' notice of the LVR restrictions.

Commentators say the bank could signal its intentions in its next Financial Stability Report, which is due on May 13.

If it gives several weeks' notice of the move then they could come into effect in late June or early July.

In the meantime, bankers and borrowers alike should be keenly aware that current low interest rates cannot continue forever and, that sooner or later, the historically low rates on the market now will increase.