The Government's "accord" with Auckland Council to prick the region's housing bubble is in danger of unravelling a week after it was signed.
Auckland Deputy Mayor Penny Hulse said legislation introduced after Thursday's Budget did not follow through with what was negotiated with the council.
"The worry we have with the legislation is that it goes back to just release the urban limits in Auckland and let's just plonk houses in paddocks," she said on radio yesterday.
The overriding message from feedback on the council's proposed unitary plan was to let communities have a say in local planning, she said.
"The idea that Wellington will reach over the top of Auckland and start doing planning from Wellington will be abhorrent."
But Prime Minister John Key told a post-Budget business audience at the Vector Arena that the Government was taking only "reserve powers" to override local councils. "It's my view that they are extremely unlikely to be used."
He said a 12 per cent rise in Auckland house prices in the past year was a national issue affecting the stability of the whole economy.
"The thing that killed the US economy was the destruction of their banking system, particularly the sub-prime mortgages, so if you get a massive bubble in your economy it's bad for the economy long-term."
He said Reserve Bank Governor Graeme Wheeler did not want to raise interest rates just to cool Auckland house prices, because it would drive up the exchange rate when three-quarters of world output was being produced by countries with interest rates at or below 1 per cent.
He expected Mr Wheeler to use new tools such as restricting the banks' loan-to-value ratios, possibly with exceptions for first-home buyers.
Last week the Reserve Bank raised the risk weights applied to housing loans granted by the four largest banks that have a loan-to-value ratio above 80 per cent, effectively raising the capital held for housing by an average of around 12 per cent with effect from September 30.
"What the Governor is very conscious of is that there are a lot of first- home buyers who do want to borrow a bit more than that," Mr Key said.
"So it's entirely possible that he will have speed limits and go to the banks and say you can have a carve-out for first-home buyers."
However, the Reserve Bank said yesterday that any loan-to-value ratios "would typically be applied in a broad-based fashion".
"Setting exemptions would not necessarily be appropriate and could significantly dilute the effectiveness of the instrument," it said.
Bankers Association chief executive Kirk Hope said banks could live with a differential for first-home buyers, but any restrictions on bank lending might simply drive home buyers to more risky unregulated lenders. Speeding up new housing supply through the accord would be a more effective way to dampen prices.