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The Reserve Bank aims to avoid a hard landing in the overvalued housing market, which could cause serious damage, like the big bust the United States suffered after 2007.
The central bank is "seriously considering" speed limits on low-deposit loans for home buyers, but has not made a firm decision yet.
The central bank hopes limiting loans with deposits of 20 per cent or less will help cool the market. Those loans make up 3 per cent of home loans now, but the Reserve Bank is not saying what the speed limit is yet.
As widely expected, the Reserve Bank held official interest rates at 2.5 per cent yesterday, pointing out that both the housing market and the New Zealand dollar were overvalued, although the currency had fallen recently. The dollar traded at US79.2c late yesterday, down from US79.8c earlier in the day.
While some bank economists expect the first move on interest rates will be in March next year, they expect some restrictions on low-deposit, high loan to value ratio (LVR) home loans this year.
The central bank hopes limiting loans with deposits of 20 per cent or less will help cool the market. Reserve Bank governor Graeme Wheeler indicated there was unlikely to be an exemption for first-home buyers.
Speaking to a Parliamentary select committee yesterday, Wheeler said the International Monetary Fund, the OECD and the Reserve Bank had all said the housing market was overvalued. The IMF and OECD have estimated prices are overvalued by up to 25 per cent.
Auckland house prices have raced up 15 per cent in the past year, with Christchurch prices up almost as much.
"This increases the financial stability risk for the banking system, as a whole," Wheeler said.
After the boom in house prices in the United States between 2003 and 2007, the global financial crisis saw house prices slump massively. A quarter of mortgage-holders saw house prices fall so far that by 2010 their bank loans were greater than the value of their homes.
"That's what we need to avoid in New Zealand - the risk that could happen and depress household incomes and put the economy into serious damage," Wheeler said.
Asked by Green Party co-leader Russel Norman if the Reserve Bank was trying to engineer a soft landing rather than a hard landing by using new tools without damaging the rest of the economy with higher interest rates, Wheeler said that was a "fair comment".
At present about 30 per cent of new home lending is in high LVR loans, up from about 23 per cent just 18 months ago.
"Very intense competition" between the big banks for high LVR home lending was pushing up house prices, Wheeler told the select committee.
The new policy tools being considered by the Reserve Bank, so-called "macro-prudential" tools, were not unorthodox, he said. Norway, Sweden, Korea, Israel and Canada had all used some form of control on loan to value ratios.