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RBNZ's Wheeler imposes low equity lending limits from October

Tuesday 20th August 2013

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Reserve Bank governor Graeme Wheeler will impose restrictions on the amount of low equity home lending private banks can write from October, in a bid to cool rampant housing markets in Auckland and Christchurch, and reducing the need for rate hikes against the backdrop of an overvalued currency.

"In the current situation, where escalating house prices are presenting a threat to financial stability but not yet to general inflation, macro-prudential policy offers the most appropriate response," Wheeler said in speech notes.

From Oct. 1, the central bank will limit the level of high loan-to-value ratio residential lending private banks can write to 10 percent, measured as an average over a six-month transition period, Wheeler said in a speech at Otago University in Dunedin. The kiwi dollar fell to as low as 79.76 US cents from 80.34 cents immediately before the announcement.

Allowing for exemptions that effectively means new home lending with deposits of less than a fifth of a property's value will amount to about 15 percent of new loans, half the volume of high LVR loanms banks were making earlier this year.

"The challenges we face with an overvalued exchange rate and over-valued housing market are not likely to dissipate quickly given the extent of the supply/demand imbalance in the housing market and the likely continued attractiveness of New Zealand assets to foreign investors," Wheeler said. "Provided loan-to-value restrictions help to dampen house price inflation, they will also assist monetary policy."

Wheeler has been balancing rising house prices in Auckland and Christchurch, the country's two biggest cities, and the pressure they may put on broader inflation against increasing the appeal of an already strong kiwi dollar by hiking interest rates.

The introduction of the low-equity lending limits will give the central bank "greater flexibility in considering the timing and magnitude of any future increases in the OCR" which is sitting at a record-low 2.5 percent, he said.

"While higher rates may well be needed next year as expanding domestic demand starts to generate overall inflation pressures, this is not the case at present," Wheeler said.

In its June forecasts, the Reserve Bank expected the 90-day bank bill, often seen as a proxy for the OCR, to start rising in June next year, with a slightly steeper curve starting in 2015, before reaching 4.2 percent in March 2016.

Last week the Reserve Bank fine-tuned the regime, which received sign-off in May, after a consultation period with private lenders. That included a transition period giving banks six months to measure their low equity loans at an average rate, before that window is reduced to a rolling three-month average for lending above $100 million.

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