New 20% deposit rule will penalise first-home buyers without addressing `real issue' of low stocks - experts.

New controls on mortgage lending, which increase the deposit required to secure a home, will shut more New Zealanders out of the market, economists say.

And many expect the changes won't hold back rising house prices - particularly in Auckland.

The chances of getting a mortgage with a deposit of less than 20 per cent have more than halved under the new rules announced by Reserve Bank Governor Graeme Wheeler yesterday, in a bid to reduce the risk of housing market meltdown.

Banks will still be able to make some loans to borrowers with less than a 20 per cent deposit, but the combined dollar amount of such loans will be limited to 10 per cent of a bank's new lending. It will be up to each bank to decide who gets a loan and who does not within that narrow limit.


Real estate company Harcourts said first home buyers would be penalised.

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Chief executive Hayden Duncan said the restrictions were stricter than expected and would have no impact on the "real housing issue" of low supply.

"Instead it will penalise first home buyers who are already struggling to enter the market and have little effect on rising house prices. Those who can afford to pay more will continue to do so."

HSBC economists Paul Bloxham and Adam Richardson said the policy should limit risks to New Zealand's financial stability, but was likely to have only a minor effect on house prices.

"A combination of low interest rates, rising inward migration and supply-side constraints are likely to see house price inflation remain elevated for some time."

The pair said "a booming housing market" along with other factors including the Christchurch rebuild would force the Reserve Bank to lift interest rates, possibly by the end of the year.


Recent HSBC analysis suggested the Reserve Bank's policy would reduce annual house price inflation by just one percentage point which would be more than offset by a recent rise in migration.

Last month, the national median house price was $385,000 according to Real Estate Institute of New Zealand figures. For the Auckland region it was $552,000.

Compared to July 2012 the national median house price increased by 6.6 per cent while Auckland was up 10.4 per cent.

Westpac chief economist Dominick Stephens said the restrictions would cause a lower rate of home ownership.

"It will be much harder for first home buyers to get into the market. Some people will still be able to, most people won't."

Chief executive of mortgage advisory service Mortgage Express Marcus Williams said there had been strong interest from second tier lenders to assist clients to meet the new requirements through short term "caveat" or bridging loans.


Other options included personal loans and family member guarantees, which mainstream banks had already indicated they would accept, Mr Williams said.

Westpac has already said it would allow prospective home owners to borrow against the equity in the property of an immediate family member, or their savings, to reach the required deposit.

Kiwibank's chief executive Paul Brock said his bank would give priority to first home buyers over those buying investment properties.

ANZ was not available for comment last night but Westpac and ASB said the Bankers Association was making comment on the policy on behalf of the major banks.

Bankers Association chief executive Kirk Hope said the lending limits may make it more difficult for first-home buyers and home-owners seeking a top-up loan for renovations.

He said banks had "reassured government that as an industry we will respond constructively and responsibly to the new lending limits".


Labour's housing spokesman Phil Twyford said the new rules were "a huge kick in the guts" for first home buyers.

"Ninety per cent of mortgages will now require 20 per cent deposit, that's going to push home ownership out of reach for most first home buyers."

Finance Minister Bill English said first home buyers "always had a pretty tough job to get the loan they want for the house they want".

"In some cases it's going to take a bit longer as they build up their deposit."

Yesterday's announcement was a surprise for Aucklander Stephen Vincent, whose dreams of owning his own home may now be another year away.

Mr Vincent, 27, and his girlfriend, Sarah, flat in Greenlane but have been eyeing up potential first homes on the North Shore.


"It is quite a shock definitely, because we just didn't see it coming. By the time that we found out we could have had 10 per cent, that's what we worked it out around ... "

"This means that we are going to have to save for longer."

Curbs on banks' mortgage lending
How do they work?
The Reserve Bank's Loan to Value Ratio (LVR) limit means in most cases home buyers will need a deposit of 20 per cent or more.
Why are the limits being introduced?
To avoid the risk of bank failures in the event of steep and widespread falls in house prices, such as occurred elsewhere during the global financial crisis, triggering a worldwide recession.
What does it mean for home buyers?
Some people will find it difficult to get a home loan and may be shut out of the market until they can save a larger deposit.
When do the restrictions take effect?
The restrictions only apply to new loans from October 1 and not retrospectively to existing ones.
What will it mean for house prices?
Westpac economists believe that after an initial downward effect as some first home buyers are excluded from the market, investors will soon step in and support prices which will then continue their upward march. HSBC research suggests house price growth will be reduced by 1 per cent as a result.

How the changes will work
Three properties currently on the market
Three-bedroom home in Clendon Park
Asking price: $350,000
Previously: 10% deposit of $35,000.
Under new rules: Minimum 20% deposit of $70,000

Three-bedroom home in Browns Bay
Asking price: $658,000
Previously: 10% deposit of $65,800
Under new rules: Minimum 20% deposit of $131,600

Three-bedroom townhouse in Campbells Bay
Asking price: $980,000
Previously: 10% deposit of $98,000
Under new rules: Minimum 20% deposit of $196,000


- Additional reporting: Morgan Tait