New Zealand central bank unveils crackdown on lending to property investors

New Zealand's central bank Wednesday revealed plans for tighter lending controls on property investors in the country's biggest city in a bid to tackle a key risk to financial stability.

The Reserve Bank of New Zealand (RBNZ) said that property investors in Auckland, home to a quarter of New Zealand's population, would require a deposit of at least 30 percent when seeking a mortgage from Oct. 1.

The restriction excluded the construction of new homes.

Most owner-occupiers seeking to buy a home would still require a deposit of 10 percent, RBNZ Governor Graeme Wheeler said in a statement.

Auckland house prices have been rising rapidly since late last year and the city's median house price was 60 percent above its 2008 level.

"This reflects ongoing supply constraints and increased demand, driven by record net immigration, low interest rates and increasing investor activity. Prices in the Auckland region have become very stretched, increasing the risk of financial instability from a sharp correction in prices," said Wheeler.

The RBNZ was also raising the loan-to-value ratio (LVR) on borrowing outside Auckland from 10 percent to 15 percent, said Wheeler.

"We are proposing these adjustments to the LVR policy to more directly target investor activity in the Auckland region, where house prices relative to incomes and rent are far more elevated than elsewhere in New Zealand," he said.

"The objective of this policy is to promote financial stability by reducing the rate of increase in Auckland house prices, and to improve the resilience of the banking system to a potential downturn in the Auckland housing market."

Auckland house prices were one of three key risks to New Zealand's financial stability, including the sharp fall in dairy farm incomes due to falling global prices, and low interests rates internationally, which were encouraging investors into riskier assets in the search for yield.

"Prior to the proposed introduction of the policy in October, we expect banks to observe the spirit of the restrictions and not seek to expand high-LVR investor lending in Auckland," deputy Governor Grant Spencer said in the statement.

The RBNZ was also establishing a new asset class for bank loans to residential property investors, and commercial banks would be expected to hold more capital against this asset class to reflect the higher risks inherent in such lending.

"Given the broader risks facing the financial system, it is crucial that banks maintain their capital and liquidity buffers and apply prudent lending standards. Later this year the reserve bank will be reviewing bank capital requirements in light of global and domestic developments affecting the safety of the banking system," Spencer said. Endi