The Reserve Bank’s move yesterday to increase deposit requirements on investment property (to 40%) and across New Zealand on owner-occupied property (to 20%) applying from September 1 may only be the beginning.  

It has also taken further steps also to impose debt to income lending limits. 

And it is  not backing down from its proposal that the Government look at both immigration and taxation and their impact on house prices. 

In its statement yesterday, the Bank said it would continue to explore whether additional macro-prudential measures might be necessary to mitigate growing risks around the housing market. 

“Possible future measures could include a limit on high debt-to-income lending and  additional capital overlays,” it says. 

In a study published yesterday the Bank notes that currently, around 40 percent of  residential mortgages are issued at more than five times the borrower’s  gross annual income and around 20 percent of investor lending is at very elevated debt-to-income ratios of above seven. 

“This figure suggests that many investors could struggle to service loans in the event of a sustained fall in rental income,” the Bank says.  

The  Bank believes that new restrictions on the availability of high debt to income (DTI) lending could complement the current loan to value ratio (LVR)  policy by further mitigating housing credit risk. 

“By improving the ability of households to cope with income or interest rate  volatility, lower DTIs would further reduce the likely rise in mortgage defaults during  a severe housing downturn, it says.  


“Tighter DTI requirements would also have some impact in lowering credit demand and house price inflation. “ 

It says it will continue to investigate the case for a DTI limit shortly. 

And  the Bank has another reminder for the Government that “rapid growth in house prices fundamentally reflects an imbalance between underlying housing demand and supply, particularly in Auckland. 

“Broader measures are required to reduce these imbalances, with the relevant policy areas extending well beyond financial policy and the responsibilities of the Reserve Bank 

The Bank’s Consultative document includes a reference to a recent speech by Deputy Governor Grant Spencer, who suggested the Government could look at both taxation and migration levels with respect to housing price inflation. 

The Government has rejected that suggestion. 

Reaction to yesterday’s statement has varied with economists suggesting that it might make an interest rate cut easier since it would have less of an impact on house price inflation. 

Westpac economist Michael Gordon noted that the  NZ dollar fell half a cent, and the two-year swap rate fell by four basis points after the announcement, an indication the market believes the Bank will cut the OCR in August. 

“With new steps under way to deal with booming house prices, the market now sees a greater chance of interest rate cuts by the RBNZ,” he said. 

Political reaction was more critical. 

The Greens offered themselves as unlikely allies of the Bank with Finance spokesperson Julie-Anne Genter saying: “It’s way overdue for the Government to show leadership, and remove the tax advantages of property speculation.” 

And Labour’s Grant Robertson said The proposal by the Reserve Bank to tighten loan to value ratios for investors showed  they were  prepared to do their bit to crack down on speculators, “while National is still stuck in denial mode.”

NZ First Leader Winston Peters took a slightly different attack – singling out immigration. 

“There is a touching naivety, and a serious lack of being street wise, in the Reserve Bank’s approach,” he said. 

 It ignores the two great drivers – high immigration and offshore buying. 

The high immigration and offshore buying are linked particularly to the rental market. 

The fact is offshore investors are not being provisioned by the New Zealand-based banks for a start. 

“Given the way house financing is constructed from offshore, foreign investors will carry on as usual whilst New Zealand investors will simply have to stump up a greater deposit.” 

The Bank’s refusal to back down on its suggestion that the Government act on tax and immigration is going to legitimise these Opposition statements — a fact that will undoubtedly continue to annoy Finance Minister Bill English.