New Zealand Targets Mortgage Lending to Avert Bubble; Restrictions to Be Placed on Bank Lending to Home Buyers Able to Make Only Small Downpayments

August 20, 2013, 5:05 a.m. ET

New Zealand Targets Mortgage Lending to Avert Bubble

Restrictions to Be Placed on Bank Lending to Home Buyers Able to Make Only Small Downpayments

LUCY CRAYMER And REBECCA HOWARD

WELLINGTON, New Zealand—New Zealand’s central bank imposed new curbs on mortgage lending aimed at heading off a nascent housing bubble that in the past has contributed to a recession. Reserve Bank of New Zealand Gov. Graeme Wheeler said in a speech that from Oct. 1, restrictions would be placed on bank lending to home buyers able to make only small downpayments. Under the plan, no more than 10% of new mortgage lending by registered banks may be to borrowers that put down less than 20% of the cost of the property as a deposit.The move is aimed at keeping house prices in check while maintaining the current record-low interest-rate setting to shield the economy from global economic shocks and help keep downward pressure on the currency, whose persistent strength has long weighed on the earnings of local exporters.

The central bank has already looked at raising interest rates from 2.5% to counter sharply rising house prices in the country’s two biggest cities, but the bank is keen to keep the rate at its current level.

House prices in Auckland, a city experiencing rapid population growth, have climbed sharply in recent months. In Christchurch, where an earthquake two years ago killed 185 people and caused over US$34 billion of damage, prices have rallied amid an ongoing housing shortage. Last month alone, house prices nationally jumped 6.6% from a year earlier, according to the Real Estate Institute of New Zealand.

New Zealand experienced a housing boom in the early 2000s fuelled by easy credit and a local preference for investing in the housing sector. At the time, the central bank tried to moderate house prices by boosting the cash rate, with little success. With so much of the country’s wealth tied up in housing, when prices eventually did fall the nation dipped into a recession even before the global financial crisis.

Central banks worldwide have been experimenting with targeting specific pockets of financial excess—in particular the real estate sector, which was at the center of the global financial crisis. In South Korea, the government has curbed real-estate sector lending, while the Canadian government changed rules recently to effectively increase monthly payments on new loans.

The New Zealand dollar fell to US$0.7979 after the speech from US$0.8020, while short-term interest rates dropped by 5 basis points.

The market chose to read the speech as “dovish,” Westpac chief economist Dominick Stephens said in a note to clients.

Mr. Wheeler left the timing of any rate increases open, stating “higher policy rates may well be needed next year.” However, he said that an increase in the cash rate “would risk causing the New Zealand dollar to appreciate sharply, putting further pressure on New Zealand’s export and import competing industries.”