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RBNZ Imposes Restrictions on Low-Deposit Home Lending

RBNZ Imposes Restrictions on Low-Deposit Home Loans From Oct. 1
Houses stand under construction behind palm trees in the suburb of Hobsonville Point in Auckland. The Organization for Economic Cooperation and Development said in May that New Zealand’s homes were the fourth most over-valued in the developed world, behind only Belgium, Norway and Canada. Photographer: Brendon O'Hagan/Bloomberg

New Zealand’s central bank will impose restrictions on low-deposit home lending from Oct. 1 to guard the financial system from a bubble that has made houses in the nation the fourth most overvalued in the world.

Loans for more than 80 percent of a property’s value must account for no more than 10 percent of a bank’s new lending, from about 30 percent now, the Reserve Bank of New Zealand said in a statement. The New Zealand dollar declined after Governor Graeme Wheeler said the kiwi is “over-valued relative to what would be sustainable long-term.”

Wheeler wants to curb the excesses of the property market, concerned that the banking system is getting over-exposed to any sudden collapse in house prices. He has been reluctant to raise interest rates because that may stoke demand for the New Zealand dollar, hurting exports and hindering an economic recovery.

“If they were to whack up interest rates right now, when rates are still so low elsewhere, there is that risk that the currency gets pushed up further,” said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “They will be hoping that these restrictions have an impact on house prices and reduce the need to put interest rates up.”

The New Zealand dollar fell to 79.90 U.S. cents at 4:50 p.m. in Wellington from 80.23 cents immediately before the statement. The two-year interest rate swap yield fell to 3.45 percent from 3.55 percent.

Interest Rates

The central bank has held the official cash rate at a record-low 2.5 percent since March 2011. Wheeler on July 25 said the RBNZ expected to keep the cash rate unchanged through the end of 2013.

“While higher policy rates may well be needed next year as expanding domestic demand starts to generate overall inflation pressures, this is not the case at present,” Wheeler said today. “Any OCR increases in the near term would risk causing the New Zealand dollar to appreciate sharply, putting further pressure on New Zealand’s export and import competing industries.”

Wheeler today reiterated that as much as 30 percent of new loans were being made with loan-to-valuation ratios of more than 80 percent, up from 23 percent in late 2011.

The Organization for Economic Cooperation and Development said in May that New Zealand’s homes were the fourth most overvalued in the developed world, behind only Belgium, Norway and Canada. Prices rose 8.1 percent in July from a year earlier, the fastest pace since January 2008, according to Quotable Value New Zealand, a government research company.

House Prices

The central bank expects home-loan restrictions to curb house-price growth, reducing the risk of a slump in values that would damage the financial system and the economy, Wheeler said. Allowing for exemptions including bridging loans, refinancing of existing loans and lending under a government plan for low-income earners, the effective limit on lending with a high loan-to-valuation ratio is 15 percent, he said.

The measures are temporary and will be eventually removed “if there is evidence of a better balance in the housing market,” Wheeler said. If they are not effective, they will be removed “but in this case their removal might necessitate higher interest rates than otherwise” or the use of other prudential tools, he said.

Wheeler has an agreement with Finance Minister Bill English to also use tools that require banks to hold additional capital or increased funding from long-term sources. He selected loan restrictions because they can damp asset prices more directly, he said.

Sweden, Canada

New Zealand joins nations such as Sweden and Canada in imposing loan limits. In Canada, house prices across 11 cities rose 1.8 percent in June from a year ago, the slowest since October 2009, after the nation in June 2012 reduced the amount homeowners could borrow against the value of their property.

Still, in Sweden, which in October 2010 capped mortgages at 85 percent of a property’s value, apartment prices jumped 11 percent in the 12 months through June compared with a 3 percent gain the previous year, according to Svensk Maeklarstatistik.

In New Zealand, the proposals have raised concerns that first-home buyers who may struggle to raise a 20 percent deposit will be shut out of the market. Government-owned Kiwibank today said it would give priority to those buyers over people seeking investment properties.

Wheeler urged that priority be given to increasing housing supply. Supply contraints have been driving price increases in the nation’s biggest city of Auckland. More building and limits on lending will help reduce the risk of a house-price boom, Wheeler said.

“Provided LVR restrictions help to dampen house-price inflation, they will also assist monetary policy,” he said. “As such, they increase the flexibility available to the Reserve Bank in determining the timing and magnitude of future adjustments to interest rates.”

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