RBNZ Says Lending Limits Curbed Home Sales More Than Expected

New Zealand house sales fell more than expected after the introduction of mortgage lending restrictions last October, the central bank said.

Sales slumped 11 percent between October and March, the Reserve Bank of New Zealand said in its semi-annual Financial Stability Report in Wellington today. The RBNZ had expected sales to fall by between 3 percent and 8 percent in the year through October 2014, it said.

Governor Graeme Wheeler has raised interest rates twice this year to damp inflation pressures as booming dairy exports and the rebuilding of earthquake-damaged Christchurch fuel economic growth. Still, he said last week that the strength of the New Zealand dollar is holding down import prices and may reduce the pace and extent of future rate increases.

The RBNZ reiterated today it could consider removing the restrictions on high loan-to-value-ratio mortgage lending later in 2014. House prices rose 8.4 percent in April from a year earlier, the slowest annual pace in seven months, Quotable Value New Zealand, a government owned property researcher, said May 8.

“The restriction of high-LVR mortgages appears to be having the desired effect of bringing activity in the housing market back to a more desired level,” Wheeler said in the report. “The RBNZ expects the speed limit to remain in place until the housing market comes into better balance, with a more sustainable rate of house-price inflation.”

Lending Restrictions

Under the restrictions, 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, down from about 25 percent in mid-2013.

The restrictions have hit sales of cheaper homes the hardest, the RBNZ said. Sales of properties for less than NZ$400,000 ($345,000) fell 23 percent between October and March, it said in today’s report. First-buyer share of total home sales fell to 17 percent in February from an average 20 percent in the past two years, it said.

Before removing the LVRs, the RBNZ wants to be confident that the housing market is responding to interest-rate increases and that rising immigration isn’t causing a resurgence of house-price pressures, it said.

“A key condition for removal is a sustained moderation in house-price inflation,” it said. “In particular, house prices should be rising more closely in line with growth in household incomes.”

Wheeler raised the official cash rate in March and April, taking it to 3 percent, and has signaled further increases this year. The benchmark rate had sat at a record-low 2.5 percent for three years.

There is an 87 percent chance of a rate rise in June, according to swaps data compiled by Bloomberg late yesterday.

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