RBNZ Tightens Lending Rules to Counter House Price Increases

New Zealand’s largest banks will be required to hold more capital against risky home lending because rising property prices may be “problematic” for the financial system, central bank Governor Graeme Wheeler said.

The nation’s four biggest banks must increase the levels of capital they hold to cover high loan-to-value ratio lending from Sept. 30, the Reserve Bank said in its Financial Stability Report released in Wellington today. The move will lead to an average increase in capital held for housing of about 12 percent, it said.

“This will strengthen the capacity of the banking system to weather a housing downturn and should also lead the banks to review the riskiness of the loans they are currently writing,” Wheeler said.

Wheeler is concerned that household finances are becoming stretched as low interest rates and competition between banks stokes borrowing and home prices. The central bank has kept the official cash rate at a record-low 2.5 percent since March 2011 and is reluctant to increase it because there is a risk higher borrowing costs will further boost the New Zealand currency, damaging exports.

Today’s report doesn’t discuss interest rates. Wheeler last month said he expected to keep the official cash rate unchanged through the end of the year, citing benign inflation, the impact of a summer drought and the strong New Zealand dollar, which has gained 7 percent the past 12 months.

Currency Problems

“The relative strength of the New Zealand economy, in a period where the global outlook is quite uncertain, has pushed the New Zealand dollar to new highs that will be problematic for some firms that compete in international markets,” the RBNZ said in the report.

The New Zealand dollar bought 84.45 cents at 10 a.m. in Wellington.

Household debt is rising from a level that is already high relative to disposable income and property prices appear over-valued, Wheeler said.

House prices rose 6.5 percent in March from a year earlier, the fastest annual pace since 2008, according to Quotable Value New Zealand, a government owned property researcher. House sales in March were the highest in almost six years, the Real Estate Institute said on April 11

“The recent growth in house prices is problematic from a financial stability perspective,” Wheeler said. “Further price escalation will worsen the potential damage that could result from a housing downturn following an economic or financial shock.”

Price Pressure

The pressure on prices arises from pent-up demand, limited supply and the lowest home-loan interest rates in 50 years, particularly in Auckland and Christchurch where the supply constraints are greatest, he said.

“Demand is being underpinned by easier credit conditions, both in terms of lower mortgage rates and an increased willingness by banks to lend at high LVRs,” he said. About 30 percent of all home loans have deposits of 20 percent or less of purchase prices, the central bank said.

Rapid increases in house prices should make banks more careful about high LVR lending, it said.

Wheeler is considering raising home buyers’ minimum deposits and tightening restrictions on bank balance sheets to ward off the risk of a property bubble. The so-called macro-prudential tools include proposals to mandate funding ratios, capital buffers, and specify minimum loan-to-property value levels.

New Zealand’s four biggest lenders -- ANZ Bank New Zealand Ltd., Westpac Banking Corp., Bank of New Zealand Ltd. and ASB Bank Ltd. -- are all units of Australian banks. BNZ is owned by National Australia Bank Ltd. and ASB is a unit of Commonwealth Bank of Australia.

The Reserve Bank will soon be signing a memorandum of understanding with the finance minister to confirm the key elements of the policy, Wheeler said today.

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