Another round of lending restrictions imposed by the Reserve Bank is likely to slow the market over the coming months.

In late July the Reserve Bank announced tighter limits on lending to customers outside Auckland with low deposits, reversing the loosening announced last November. Furthermore the November restrictions requiring property investors in Auckland to have a 30 per cent deposit were tightened, with investors nationwide requiring a 40 per cent deposit.

Though the new rules don't officially come into force until October 1, the Reserve Bank expected the banks to apply them immediately, and they have. They have until October to work through outstanding loan pre-approvals.

Initial response from investor groups I spoke to has not been to stop investing in property. In fact, the opposite. They are still keen to invest, and are actively working out how to get around the lending restrictions. That might involve carefully spreading their various loans across different lenders, including organisations not currently subject to the Reserve Bank rules such as building societies and even private lending.


Other investors don't even know about the new rules and it is only when they approach their bank that they discover they will need a higher deposit than they thought.

Also, our analysis shows that for the past few years around 23 per cent of investor purchases haven't required a mortgage, they are paying cash. For investors outside Auckland, with large portfolios, that number blows out to 41 per cent of their purchases. That suggests that new lending restrictions will have little impact on those investors.

On the other hand, many first home buyers outside Auckland have been sent into a spin. If they have pre-approved lending they will be rushing to find a property before that expires -- to avoid needing a bigger deposit. Locking first home buyers out is not a popular outcome.

There are some exemptions from the lending restrictions, a notable one being that for new builds and off the plan purchases investors will not need 40 per cent deposit. That most likely means that investors intending to buy and hold will switch their attention to new properties not existing ones putting even more pressure on prices for new homes.

Previous incarnations of lending restrictions in late 2013 and then again in late 2015 both had slight and short-term impacts on the number of sales and house values. It is likely that we will see the same this time around.

The Reserve Bank's modelling predicts these lending limits will reduce the rate of price growth by 2 per cent to 5 per cent below what they would have been without the restrictions. Thinking about Hamilton, increasing at over 30 per cent year on year, these restrictions may reduce that rate into the 20s but it is unlikely that values will decline.

However, Christchurch values, unlike most of the country, have been flat or even dropping in some suburbs, so these lending restrictions will likely kick things into negative territory for six to 12 months.

If investor activity doesn't ease, then the Reserve Bank could tighten the screws further by pushing the deposit limit for investors higher. They have also talked about the introduction of limits on the ratio of lending to income.

I doubt lending restrictions are the significant trigger that will have a lasting impact on rising prices. The higher we climb, the greater the risk of a heavy fall and the potential impact of that fall on the wider economy makes it increasingly unlikely any Government would want to make it happen.