Gradual end to lending limits
First-home buyers may get only gradual relief from Reserve Bank speed limits on low-deposit home loans, which may be phased out from the end of the year at the earliest, the central bank says.
The restrictions on higher-risk lending were imposed in October and have hit hardest at the lower end of the housing market, where sales volumes have slumped.
Some first-home buyers have been frozen out of the market, though they still make up almost one in five buyers.
In its Financial Stability Report, out yesterday, the Reserve Bank also said houses were overvalued and household debt was high compared with incomes, but the country's financial system remained sound.
But speed limits on low-deposit home loans brought in late last year would stay in place till late this year at the earliest, the bank said. Without the speed limits, house prices would have been 2.5 per cent higher in the March year.
It would remove the limits only when house price rises cooled down and were rising more in line with the growth in household incomes.
Deputy governor Grant Spencer said the speed limits could "potentially be lifted to some interim stage before it is removed".
The Reserve Bank had not yet thought how long such a phase could last.
The housing market is being pushed up by a shortage of homes in Auckland and Christchurch, as well as much stronger than expected migration. But interest rates have risen twice so far this year and another move is expected next month.
Before the Reserve Bank imposed the speed limits on higher-risk loans last year, such lending made up about 30 per cent of home lending. Since the new rules came in that has slumped to less than 6 per cent, hitting first-home buyers.
"First-home buyers have been a higher proportion of the high loan to value ratio, LVR, part of the market so they have been impacted more," Spencer said. "But that was not the intended policy, which was to reduce higher-risk lending."
But with interest rates rising this year, the speed limits meant fewer people would have jumped into the property market and gone "up to the hilt, stretching themselves to get a mortgage", Spencer told Parliament's finance and expenditure select committee.
"They may have been under real stress as interest rates go up," he said yesterday.
Spencer also ruled out any possibility that the speed limits could be removed by region.
Asked if the lending speed limits had been "too effective", Reserve Bank governor Graeme Wheeler said New Zealand house prices rose faster than those in any other OECD country in the five years before the global financial crisis hit.
House prices did not fall much during the global financial crisis and had started to take off again, partly because of a housing shortage and interest rates at 50-year lows, while inflation remained low.
The speed limits on bank lending had worked "very well" to cool house prices, Wheeler said.
The financial system remains sound; it is stronger than at any time during the economic cycle from 1999 to 2007. But risks to financial stability remain: House prices are overvalued by more than 20 per cent compared with incomes, and more than 60 per cent compared with rents. House prices stood out as "particularly stretched among OECD economies", the report says. The Reserve Bank is worried about high farm debts, concentrated among a small group of dairy farmers. Lending limits: Speed limits on low-deposit loans to stay in place till the end of the year at least, but could be eased gradually. House-sales volumes have dropped 11 per cent since October when speed limits were imposed, which was much more than first expected. The biggest impact was on homes worth under $400,000, where volumes fell 23 per cent. Source: Reserve Bank