The Reserve Bank has started the formal consultation ahead of imposing tighter controls on the home loan market.
The Reserve Bank. Photo:
It has released background papers and opened a two-week window for consultations on halving the amount of low interest mortgages banks can make to owner-occupiers to no more than 10 percent starting from next month.
RBNZ deputy governor Geoff Bascand said house prices had moved above their sustainable level, increasing the risks of a housing market correction.
"The proposed tightening of LVR (loan-to-value ratio) restrictions will over time help reduce the number of highly leveraged borrowers and help to build resilience in the financial system."
Tightening LVRs to reduce risky lending to property investors at the start of the year had had an effect, but house prices had kept rising and there had been a significant rise in higher risk loans to owner occupiers, Bascand said.
Recent data from research firm CoreLogic showed a 27 percent annual rise in the average house price, although the rate of monthly increase was slowing.
Bascand said much of the low-deposit lending had gone to first home buyers, but the overall risk to the financial system was rising.
"Although our stress testing indicates that the financial system is well-placed to weather shocks such as a downturn in the housing market, we are concerned about the potential future risks to economic and financial stability of allowing this higher risk borrowing to continue at its current rates."
Tighter lending rules would make it harder in the short term for first home buyers to get into the housing market, he said.
"However, reducing house price inflation will improve affordability for first-home buyers."
The RBNZ has also been given tentative approval by the government to prepare debt-to-income ratios, a measure of lenders' ability to service loans, which it will start consulting on next month, but would not be imposed until next year if needed.