RBNZ to rein in housing boom with lending limits

Bloomberg

New Zealand’s central bank is moving to quell the country’s housing boom by restricting the amount of money property investors can borrow, paving the way for another cut in interest rates.
The Reserve Bank will require investors across New Zealand to have a deposit of at least 40 percent, it said in a statement in Wellington. The new rule, which tightens an existing requirement that investors in Auckland have at least a 30 percent deposit, will be introduced on September 1, the RBNZ said.
New Zealand’s dollar fell as markets bet Governor Graeme Wheeler will now be free to respond to persistently weak inflation by cutting the official cash rate to a record-low 2 percent on August 11. He has been reticent to lower borrowing costs for fear of stoking housing demand.
“The intention to put new lending restrictions in place means one potential roadblock to responding to the weak inflation environment will be reduced,” Nick Tuffley, chief economist at ASB Bank in Auckland, said in an e-mailed note. The announcement “reinforces the likelihood of the RBNZ cutting in August, given the very tight timeline proposed for implementing the added restrictions,” he said.
There’s a 78 percent chance of a quarter-point rate cut next month, according to swaps data. The odds have increased since a report showed consumer prices rose 0.4 percent in the second quarter from a year earlier – less than the RBNZ forecast and the seventh straight quarter the gauge has been below the central bank’s 1-3 percent target range.
The proposed new lending rules remove the distinction between Auckland and the rest of the country, Wheeler said in the statement. Since November, the RBNZ has required most investors buying Auckland properties to have a 30 percent deposit, but that has prompted many to look at opportunities in other centers.
In the North Island city of Hamilton, house prices rocketed 29 percent in the year through June.
In a July 7 speech, RBNZ Deputy Governor Grant Spencer flagged nationwide restrictions on property investors, adding he expected the bank to act by the end of the year.
The RBNZ proposes that just 5 percent of banks’ new lending can go to investors who have less than a 40 percent deposit. It also said no more than 10 percent of new lending can go to owner-occupiers who have less than a 20 percent deposit. That reverses a relaxation in the rules last year that allowed more low-deposit lending to borrowers outside Auckland.
House price inflation accelerated for a third month in June, with prices jumping 13.5 percent from a year earlier, according to Quotable Value New Zealand. Prices in Auckland, home to a third of New Zealand’s population, surged 16.1 percent, and 46 percent of sales were to investors.
“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country,” Wheeler said. “A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.”
The central bank is also progressing work on so-called debt-to-income ratios similar to those used in the UK.