The Reserve Bank says it's too early to draw conclusions on the impact of its restrictions on low equity home loans, though the early indications are that they have tweaked lenders' behaviour.
The pick-up in house prices over the past 18 months is still the biggest risk to the stability of country's financial system, which is still sound, with both banks and households "highly exposed to the housing market," governor Graeme Wheeler said at today's release of the Reserve Bank's six-monthly financial stability report.
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A shortage of supply, particularly in Auckland and Christchurch, rising inbound migration and low interest rates are fuelling the property market, and the central bank aims to limit that growth with limits on the level of mortgage lending banks can write with less 20 per cent of a property's value as a deposit, which came into force on October 1.
"The early evidence shows that banks have significantly reduced high LVR lending approvals, while increasing the cost of high LVR loans," Wheeler said in a statement. "However, it is too early to assess the impact of the measures on house price inflation."
Real Estate Institute figures yesterday showed house sale prices continued to rise last month and were up 9.8 per cent from a year earlier, though anecdotal evidence indicated growth in the volume of sales slowed as buyers were more reluctant to make a decision amid the uncertainty of the loan restrictions.
The central bank is concerned that if households take on too much debt, a fall in house prices could leave them owing more on a property than what it's worth, or interest rate hikes scheduled for next year will put them under pressure to service their interest bill.
Market pricing indicates mortgage rates will rise to around 7 per cent or 8 per cent over the next two or three years, the bank said.
The Reserve Bank anticipates the high LVR loan limits will reduce sales growth by between 3 per cent and 8 per cent, slow house price inflation by between 1 and 4 percentage points, and lower household credit growth by between 1 and 3 percentage points.
"There is likely to be a degree of market volatility over the first few months that LVR restrictions are in place, as market participants adapt to the new environment," the report said. "It will not be until property market activity settles down in a few months' time that a clear view of the impact of the restrictions will emerge."
The central bank didn't see any material evidence that buyers ramped up their activity in the six weeks between the initiative's announcement and its implementation, and said that may have been down to banks tightening credit criteria to control its pre-approval pipeline in anticipation of the restrictions.
The Reserve Bank reiterated that it will remove the restrictions when "significant imbalances in the housing market have abated" and that broader financial conditions, such as monetary policy, will have to be weighed when making that decision.
The limits would also be removed if they aren't achieving their desired outcome, or if they create distortions that outweigh their benefits.