It is yet to be seen whether measures brought in to cool the housing market have worked, the Reserve Bank says, and it is prepared to do more if required.
(File image). Photo: RNZ / Nate McKinnon
In its six-monthly financial stability report, the central bank said it may need to take further action to cool the market.
Reserve Bank deputy governor Geoff Bascand told Morning Report it was still early days to see the effects of the government's recent housing package, but he believed they would help alongside the bank's own measures, like reintroducing LVR restrictions.
But with prices rising 19.8 percent year on year, how long would it take before buyers are able to see the impact? "Time will tell," Bascand said, adding that it depended on how people responded to the changes.
"I know what we're worried about from a financial stability point of view is how risky that lending is, and I guess the big thing we try to do is lean against risky lending.
"You see new borrowers or who are more exposed to taking on the high debt borrowing, where if they had a loss of income or interest rates change or something they'd be more exposed so, it's making sure the new borrowing is not too risky."
"Those long-term drivers look like they're softening so prices shouldn't keep rising" - Reserve Bank deputy governor Geoff Bascand
Another worry for the bank was if a 'sharp correction' occurred, potentially causing prices to dramatically fall 10-20 percent at once.
While first-home buyers might be pleased with that idea, Bascand said the bank was concerned about the effect of a sharp drop in prices - rather than gradual adjustment - on financial stability and the economy.
"What we want from our financial stability point of view is to avoid high risk lending and to see prices, and see the market adjust gradually over time, to try and keep those prices close enough to where the fundamental drivers are."
The latest CoreLogic House Price Index report noted a reduction in demand of valuations, down 11 percent compared to the previous six months.
Meanwhile, the latest Trade Me Property Price Index showed the national average asking price for a home hit a record $805,000, with the national average asking price showing an annual increase of 16 percent in the year to March.
Bascand said they were trying to ensure the market would be able to absorb the fluctuation in prices without too many people being at a loss.
"I think people you know people who are looking to buy have ... to be cautious and say, 'well actually when I look ahead, I think prices are not going to stay up here so I shouldn't bid that much', and I think what we're saying is obviously it's better if prices adjust gradually, than fall sharply, that's more disruptive to people and causes more pain.
"We'd all prefer a gradual adjustment but what we're saying is those long-term drivers look like they're softening so prices shouldn't keep rising in the way they have."
Debt to income ratios and loan to value ratios
Late last year, there was also talk of introducing debt to income ratios (DTIs) amid a letter to the bank from the finance minister about taking heed of the impact of any monetary policy on house prices.
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Bascand explains the differences between DTIs and LVRs: "The measures we've used, the loan to value ratio restrictions, they mean you've got to have a big enough deposit, these other debt to income or debt servicing restrictions mean can you afford it if mortgage rates rise? How secure are you if your income, if your second income disappears or something or other like that? So they are a complement."
He said the bank was still evaluating how this would work.
"This is preliminary analysis, but you probably would be setting it at a place where the highest DTI lending would be restricted, but we might allow some of it.
"Again I come back to the risk, a little bit of it where it's just temporary and banks are making an assessment that somebody temporarily has got a high DTI but they're very confident it'll be fine in three months time that will be different."
But there was more work to do on finalising those aspects of the policy advice to the minister, including how it would be targeted.
"The work we have been doing has shown that investors are a higher proportion of the high DTI borrowers, then we had previously understood... You do more work you learn more things and what we find that yes, many investors are at high DTI so it probably would bite much more on them than it would on first-home buyers."
In February, the bank announced that lending to property investors would be limited to no more than 5 percent with less than a 40 percent deposit as it moved to reimpose LVRs.
While Bascand said it was possible to move that higher for investors as another targeted policy, but using the same method repeatedly might not necessarily give the required effect.
"You do get to a point where you get diminishing returns, how much more safety for the system do we get to have a say a 50 percent deposit than a 40. Because, I mean what those do is they protect the system if house prices fall massively. Like a 40 percent fall, you've still just got zero equity in a new house.
"Actually the risks we're probably worried more about is if unemployment rises or ... interest rates rise in a long way so that's why it might be better to have a supplementary or a complementary tool rather than use the same one more and more and more."