New Zealand housing slump may be tempered by eased lending rules

NEW Zealand’s housing downturn may be tempered by an easing of mortgage lending restrictions that could fuel borrowing.

The Reserve Bank of New Zealand (RBNZ) is considering allowing lenders to make more low-deposit home loans from Jun 1, it said on Wednesday (Apr 26) in Wellington. That should lead to more credit growth than otherwise would have been the case, potentially reducing the extent of house-price declines, said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland.

“We were already seeing the risks as tilted towards house-price falls petering out before our forecast of a 22 per cent fall peak-to-tough, and this certainly does feed into that risk,” Zollner said. “But it’s a tweak rather than an overhaul.”

New Zealand house prices have dropped more than 10 per cent over the past year as the RBNZ aggressively raised interest rates to tame inflation. Since November 2021, the central bank has also imposed restrictions on low-deposit mortgage lending using loan-to-value ratios to try to minimise the financial stability risks of a housing bust.

Deputy governor Christian Hawkesby said on Wednesday that those risks have waned to a level where current restrictions may be “impeding the provision of credit to some otherwise credit-worthy borrowers”.

Currently, the restrictions mean that of the new loans banks make to owner occupiers, only 10 per cent can be to people who have less than a 20 per cent deposit. The RBNZ proposes to ease that limit to 15 per cent.

Only 5 per cent of new lending to property investors can be to those with less than a 40 per cent deposit. The RBNZ plans to tweak this deposit threshold to 35 per cent while retaining the 5 per cent limit.

The RBNZ this month raised its Official Cash Rate (OCR) to 5.25 per cent and most economists expect it to bring its tightening cycle to a close with one more hike to 5.5 per cent in May.

Zollner said it’s possible the easing of lending restrictions could increase pressure for even higher interest rates.

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“If the housing market finds a floor quicker than the Reserve Bank’s expecting, then all else equal that would mean a smaller fall in consumption and upside risk to the OCR,” she said. “I don’t think you can quantify it at the moment, but certainly we’ll be watching the housing market with even greater interest over the next few months.” BLOOMBERG