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New Zealand central bank tightens lending to avert housing market risks

Xinhua, July 19, 2016 Adjust font size:

New Zealand's central bank on Tuesday announced plans for stricter new loan-to-value ratios on home lending in a bid to rein in the country's overheated housing market.

Proposed new restrictions on commercial bank loans from Sept. 1 were aimed at mitigating risks to financial stability, Reserve Bank of New Zealand (RBNZ) governor Graeme Wheeler said.

The RBNZ has been hamstrung for months now as it struggles to balance its dual roles of maintaining a sound finance sector and keeping inflation to its target range of 1 percent to 3 percent.

With inflation tracking near zero, the RBNZ has been wary of cutting the official cash rate currently at 2.25 percent for fear of further fueling rampant housing inflation, particularly around the biggest city of Auckland, which is home to a third of the population.

"A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country," Wheeler said in a statement.

"A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy."

The proposed new restrictions would require banks to demand a deposit of at least 40 percent on up to 95 percent of their lending to residential property investors across New Zealand.

They would also be required to demand a deposit of at least 20 percent on up to 90 percent of lending to owner-occupiers nationwide.

"The banking system is heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets," Wheeler said.

"Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength. The proposed restrictions recognize the higher risks associated with such lending."

Previous loan-to-value restrictions had improved the resilience of bank balance sheets by reducing banks' exposure to riskier mortgages, and the new measures would further improve the resilience of bank balance sheets and assist in restraining credit and housing demand, he said.

Opposition lawmakers said the move would punish would-be home-buyers across the country for a housing crisis that was centered in Auckland, but they blamed the government for being in denial over the problem.

The opposition Green Party released figures Tuesday showing Auckland could face a shortage of teachers, nurses and police officers if house prices continued rising out of their reach.

"It's becoming completely unaffordable for the people who make our communities function to live in our country's biggest city," Green Party co-leader James Shaw said in a statement.

"When the median Auckland house price is almost 15 times the annual income of nurses and police officers, who can blame them for wanting to live somewhere else?" Endit