RBNZ Says Loan Limits Likely to Reduce N.Z. House Sales by 5%

The Reserve Bank said New Zealand house sales are likely to decline as a result of mortgage lending restrictions it imposed this month.

“We estimate that the net effect on house sales is likely to be a reduction of around 5 percent,” the Reserve Bank said in an analytical note on the lending restrictions published in Wellington today. It reiterated that the limits are likely to reduce house-price inflation by up to 4 percentage points in the first year.

From Oct. 1, only one in 10 new mortgages issued by banks in New Zealand are allowed to exceed 80 percent of a home’s purchase price. The Reserve Bank introduced the limit in an attempt to cool New Zealand’s housing market without raising interest rates from a record low and denting an economic recovery.

While the bank has estimated that the lending restrictions will result in 90-day bank bill yields being 30 basis points lower than otherwise, it said today this was based on the resulting reduction in general inflation pressure.

If monetary policy were used to target house prices directly, the Official Cash Rate would need to be increased “by much more than 30 basis points” to achieve the same housing market outcomes as the mortgage lending restrictions, it said.

It also said that if the limits were applied for two years immediately prior to a major fall in house prices, “we conservatively estimate that the reduction in banks’ downturn losses on their housing loan portfolios would be 10-15 percent.”

Changed Behavior

The central bank said it is possible the restrictions could lead to a reduction in house-price expectations and change consumer behavior, and that “a significant change in behavior could result in larger quantitative impact on house prices and credit growth than modeled here.”

The Reserve Bank will be watching developments in house prices and household credit “very closely” in coming months to assess the effect of the policy, it said.

A first assessment of early signs of impact will be given in the November Financial Stability Report.

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