Door closing on a Kiwi dream

Kiwis love real estate, and home loan customers who meet current credit criteria can be lent up to 100 per cent of a property's value.

But new rules being drawn up by the Reserve Bank are expected to limit banks from lending more than 80 per cent of a property's valuation.

Coming in the wake of the global financial crisis, the loan-to-value ratio (LVR) would force house hunters to come up with bigger deposits and cut many first-time buyers out of the market, critics warn.

And with about 30 per cent of new lending currently going to borrowers with deposits of 20 per cent or less, the changes would affect many.

The policy is also sparking fears that prospective buyers will go elsewhere for their money, notching up secondary loans from high interest finance companies or turning to family members for cheap cash.

The Government is wrestling with a housing crisis, in which rocketing demand in Auckland and a massive shortage of properties in Christchurch have sent average property prices spiralling beyond their 2007 market peak.

Driven by record low interest rates luring buyers, average Auckland house prices alone are now 17 per cent higher than in 2007, nudging $555,000, according to latest REINZ figures.

The situation is already locking first-time buyers out of the market and the Government is under increasing pressure to quell rising prices before the bubble bursts.

However, ASB chief economist Nick Tuffley says first-time buyers with deposits of less than 20 per cent will suffer most under the proposed changes.

"Some people [will be] shut out of buying a house they would otherwise be deemed to be a perfectly good credit risk to buy."

House hunters in this category will have three options: go down in price to afford the deposit, borrow outside of the banking system, or miss out.

Interest rates are the Reserve Bank's most effective tool to stem rising house prices, but they are not appropriate with near-flat inflation, Mr Tuffley says.

Unable to cure the house shortage, the regulator can only try to slow demand with the tools it has, he says.

Restricting high LVR mortgages could well reduce a perceived vulnerability in the banking system. But the risk may simply be shifted elsewhere if people turn to borrowing from "darker corners" of the financial world to get around new restrictions.

"Even the Reserve Bank has acknowledged there are loopholes with the policy. People can borrow money off their parents or grandparents to make up the difference.

"Those sorts of things would undermine the effectiveness of the policy."

While there are potential tradeoffs with forced lending restrictions, the Reserve Bank's main concern is that house prices will continue to rise, Mr Tuffley says.

The big issues are making housing more affordable, loosening up the supply of land and ensuring the housing market becomes more responsive to building new homes.

And while the Government has unveiled new measures to tackle these problems - including the ability to force councils to free up land - solutions will take time.

While the Reserve Bank has not yet released its final decision, deputy governor Grant Spencer said last month that LVR home lending restrictions were the favoured option, because they offered the "greatest potential for moderating the current excesses in the housing market".

Quotable Value data released earlier this month shows house values nationally rose 7.1 per cent in the past year to 5 per cent above the 2007 peak - with Auckland and Christchurch leading the charge.

However, housing experts say regional house hunters would be penalised under the proposed changes because of housing bubbles in the two main centres, as restrictions would apply to prospective buyers nationwide - regardless of location.

Real Estate Institute of NZ chief executive Helen O'Sullivan says that, outside of Auckland and Christchurch, house price increases have been "very modest".

Prime Minister John Key has tried to secure an exemption for first-time buyers but the Reserve Bank has signalled an unwillingness to provide any loophole. APNZ