In a bold move to curtail increasing house prices without destabilising economic growth, New Zealand’s central bank will impose restrictions on mortgage lending.
Under the move directed towards the riskier low deposit loans – where a buyer borrows more than 80% of the purchased price, borrowers will need a 20 percent deposit to qualify for a loan. The quota will be calculated on the dollar value of the loans. Currently 1 in 3 deposit in NZ is a low deposit loan and by October 1st when the restrictions come into affect it will be restricted to I in 10.
In Australia as housing prices continue to gain momentum, the reserve bank hasn’t ruled out following New Zealand’s measures. Both NZ and Australia share the same banks who are competing for home loan business, and there have been calls for Australian policy makers to consider similar action suggesting that it is a logical way for Australia to regulate where a potential housing bubble is developing without raising rates and crushing the rest of the economy.
Banks haven’t been as enthusiastic suggesting that it may be a sensible tool but it may be more like robbing Peter to pay Paul – cooling one market may have an adverse effect on other markets.
Finance commentators have suggested that other motives may be behind the banks’ lack of enthusiasm to introduce similar measures; namely the fact that they are currently making a lot of money on high loaned valuation ratio lending at a premium rate.
Although the move by New Zealand is the first of its kind, they aren’t the only country resorting to such measures to try and cool its housing market. Canada, Israel and South Korea have all reportedly tried similar approaches, with varied results.