International ratings agency Fitch Ratings says New Zealand house prices could still be in for sharp drop, despite the recent softening of the LVR restrictions.

Fitch said the Reserve Bank's move is unlikely to have a significant impact on the housing market and that certain risks remain.

"A sharp housing market correction remains a possibility with price-to-income ratios still high, but it is not our base case and slowing price growth has dampened risks," Fitch said.

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Fitch said the LVRs imposed from 2013 have helped cool the housing market, halving annual house price inflation nationally to 5 per cent and from an average of 15 per cent in Auckland between 2013 and 2016 to 1 per cent in the year ended October this year.

"We expect only modest gains of 3 percent per year in 2019-20. Housing supply is still constrained and low interest rates will continue to support demand but the recent ban on most non-residents purchasing a house will act as a drag," the ratings agency said.

On Wednesday, the Reserve Bank said it will ease the LVRs from January when it will allow banks to increase their lending to borrowers with less than a 20 per cent deposit to up to 20 per cent of total new mortgage lending, up from 15 per cent currently.

As well, the deposits investors must have has been eased to 30 per cent of a property's value, down from 35 per cent previously.

Although banks are allowed to lend up to 5 per cent of total new lending to investors with smaller deposits, that level is so low as to effectively bar such lending.

The central bank's first easing of LVRs had been from January 1 this year.

There have been growing concerns that the local market will follow the decline in Australia, which has seen house prices slump around 3 per cent nationwide, but as much as 5 per cent in the Melbourne market and more than 7 per cent in Sydney.

New Zealand housing prices in this market have historically followed Australia, and economists predict that cool down across the ditch could spread here in the coming months.


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So far this year, the Auckland market has stalled and is tracking sideways but growth remains strong in the regions.

Analysts in the mortgage industry hoped that an easing of the LVR restrictions would stimulate the market by giving first-home buyers easier access to homes.

But Fitch isn't convinced it will make a big enough difference.

Even with the second easing, "we still view them as relatively tight and do not expect a significant easing of lending standards in the medium term," Fitch said.

"The share of high LVR mortgages in banks' total new residential mortgage commitments has increased slightly this year and could edge up further in 2019 following the latest easing," it said.

"However, lending at high LVRs is likely to remain far lower than before restrictions were first introduced in October 2013."

Therefore, "we do not expect the changes to have a meaningful impact on the credit profiles of Fitch-rated banks".

Ahead of the first LVRs from October 2013, ASB Bank had been the most exposed to high LVR lending, largely reflecting its origins in Auckland where house prices are significantly higher than in the rest of the country.

In the June quarter of 2013, a whopping 73.4 per cent of ASB's new mortgage lending was to customers with less than a 20 per cent deposit.

By the six months ended June this year - the Reserve Bank dropped the requirement for banks to produce quarterly disclosure statements from the March quarter of this year - ASB's lending to people with less than a 20 per cent deposit had dropped to just 7.5 per cent of new lending.