House buyers may need bigger deposit

BILL ENGLISH: Rules are likely to include requiring home buyers to have bigger deposits.
BILL ENGLISH: Rules are likely to include requiring home buyers to have bigger deposits.

Rules aimed at taking some of the heat out of the housing market and providing greater financial stability could be agreed as early as the middle of the year, Finance Minister Bill English says.

Those rules are likely to include requiring home buyers to have bigger deposits.

In a speech to a business audience in Auckland today, English said the Reserve Bank would consult over the next few weeks on proposals giving it a greater ability to influence the amount of lending done by banks and other financial institutions.

These might include requiring lenders to:

* Restrict high-loan-to-value ration lending in the housing sector.

* Hold additional capital on their balance sheet as a buffer during an economy wide credit boom.

* Hold additional capital against loans in specific sectors if risks emerge in those sectors

There were some expectations that these would be used immediately to dampen the Auckland housing market but those decisions would be in the hands of the Reserve Bank, English said.

English was asked whether he was concerned that the introduction of a cap on loan-to-value ratios - the amount of deposit required for a loan - would hurt small to medium-sized business owners who often used their homes as security on a loan to expand their business.

English said that if the move went ahead, it would probably only be used as a last resort by the Reserve Bank when lending well outstripped growth in the economy.

It would not be used every day to "fiddle in the economy".

ANZ chief economist Cameron Bagrie said the mid-year target date suggested "there's been a lot more thought gone into getting monetary policy a few more mates".

He was not a fan of rules on the loan-to-value ratio of mortgages, saying it was "akin to throwing a rock into a creek.

"You will find the water gets around the rock."

But he thought some of the other instruments being put on the table would be effective.

"It's a tall ask for interest rates alone to cope with an economy that's still deleveraging, a global economy that's wobbly, a currency that's over-extended. We have a city rebuild to continue with and we've got a housing shortage in Auckland.

"It's a tall order to expect the official cash rate alone to navigate us through that lot."

Bagrie cautioned against action that might restrict the flow of credit, and said the criteria for using the instruments being proposed needed to be very clear.

He described the housing market as "frothy", and doubted it was heading into bubble territory.

While some action was needed on the demand side if there was a desire to take heat out of the property market, action also needed to be taken on the supply side given the shortage of houses.

In his speech, English said the greatest influence on the housing market would remain interest rates and supply constraints created by the planning system.

"Later this year, the Government will have more to say about how the financial stability tools will work alongside policies on more flexible supply in the housing market and social housing reform," English said.