8 May 2013

Reserve Bank tightens rules around riskier mortgages

10:31 pm on 8 May 2013

The Reserve Bank's move to tighten rules around riskier mortgages could make it more difficult for some would-be home-owners to buy a house.

First-home buyers are likely to be most affected since they are the ones who find it most difficult to save for a deposit.

The Reserve Bank is worried about the potential damage to the financial system which could come from loans to people with deposits of less than 20% of the price of the houses they want to buy.

The banks are doing a lot of such riskier lending. Since October 2011, it has shot up from 23% of total new mortgage lending to 30% as there are fewer people wanting to borrow.

Reserve Bank figures show new housing loans in the March quarter this year totalled $2.71 billion, about half the amount in the March quarter of 2007.

Meanwhile, Reserve Bank Governor has warned that a stronger housing market is putting the health of the financial system at risk.

Mr Wheeler made the comments on Wednesday during a Parliamentary committee briefing for the central bank's six-monthly financial stability report.

He said the financial system is sound, but under threat from surging house prices in Auckland and Christchurch, and household debt is rising from already high levels compared with incomes.

Mr Wheeler said further increases in house prices would worsen the potential damage that could result from a housing downturn if there is an economic or financial shock to the country.

He admits a sharp downturn in house prices is rare in New Zealand, if not in other parts of the world, and the Reserve Bank is taking steps to reduce that risk by getting banks to hold more capital against their riskier loans from the end of September this year.