19 Jul 2016

Property investors may need 40% deposit to borrow

10:40 am on 19 July 2016

The Reserve Bank is proposing extending lending restrictions to try to cool the housing market.

09062016 Photo: RNZ/Rebekah Parsons-King. Governor of the Reserve Bank of New Zealand, Graeme Wheeler delievers lastest OCR annoucement.

Graeme Wheeler (file) Photo: RNZ / Rebekah Parsons-King

The central bank is proposing to raise to 40 percent the deposit property investors would need to have to borrow from banks, and extend the rule to the whole of the country.

Currently Auckland property investors need a 30 percent deposit.

Proposed new restrictions:

  • No more than 5 percent of bank lending to residential property investors across New Zealand would be permitted with a deposit of less than 40 percent.
  • No more than 10 percent of lending to owner-occupiers across New Zealand would be permitted with a deposit of less than 20 percent.
  • Loans exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

Reserve Bank Governor Graeme Wheeler said the banking system was heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets.

"The proposed restrictions recognise the higher risks associated with such lending."

Mr Wheeler said the drivers of the housing market strength were complex and action was required on many fronts that extended well beyond financial policy.

"Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority.

"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.

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 policy initiative was intended to further improve the resilience of bank balance sheets, he said, adding the banks were expected to "observe the spirit of the new restrictions in the lead-up to the new policy taking effect."

Consultation ends on 10 August and the new rules would come into effect on 1 September.

Mr Wheeler said the Reserve Bank was also looking at debt to income ratios.

ASB Bank chief economist Nick Tuffley said the Reserve Bank was acting with a sense of urgency that was missing in earlier public statements.

"We had expected further measures." said Mr Tuffley, just not quite this soon."

Get the RNZ app

for ad-free news and current affairs