New rules on low-equity mortgages could become stricter yet with international evidence showing the effect on house prices tends to be "modest and short-lived".
The Reserve Bank last week announced its well telegraphed restrictions on high loan-to-value ratio (LVR) lending would come into force from October 1.
The central bank is concerned about the rapid rise of house prices, and the potential risks that poses to the economy.
Westpac senior economist Michael Gordon reviewed four case studies of countries where LVR limits have been introduced previously and found mixed results.
"While LVR restrictions have probably slowed the rate of growth in house prices and household debt, the impact has tended to be modest and short-lived."
Most of the impact came in the first three to six months and only slowed the rate of house price growth, rather than actually lowering prices.
Gordon also found that regulators had rarely used the LVR tool only once, instead tightening the limits over the course of several years.
"The main lesson for New Zealand is that last week's LVR restrictions probably shouldn't be viewed as a one-off measure," he said.
It was possible that the central bank would either tighten the limit further, or complement it with other tools, including raising the official cash rate where possible.
The Reserve Bank has opted for "speed limits" rather than out-and-out caps on high LVR lending.
Banks will have to restrict loans with LVRs of more than 80 per cent to no more than 10 per cent of the dollar value of their new housing lending flows.
Westpac chose four countries with similar market conditions to New Zealand to study; South Korea, Canada, Israel and Sweden.
Countries with fixed exchange rates and limited ability to influence interest rates, such as Hong Kong and Singapore, were excluded.
SOUTH KOREA
Deregulation in the financial sector led to "explosive" growth in household credit in the late 1990s and early 2000s.
The Bank of Korea started introducing LVR limits in 2002, later combining them with caps on debt servicing to income ratios.
The restrictions were tightened 12 times and loosened five times between 2002 and 2010, though not always at the national level.
Studies found the tightening measures helped slow the rate of house-price inflation and household debt over a three to six-month period.
CANADA
Canadian lenders have to buy mortgage insurance cover for high-LVR loans, mainly through a government-backed agency.
After a housing boom in the early noughties, the agency's underwriting standards were tightened to lower the maximum LVR from 100 per cent to 95 per cent.
There were three further rounds of tightening up to 2012, which capped refinancing at 80 per cent of the home's value.
While the early move in 2008 had no lasting impact, especially as borrowers dodged it through innovative lending practices, the latter measures were more successful.
The ratio of household debt to disposable income continued to rise from 150 per cent in 2008 to 165 per cent today. One study suggested it would have reached 170 per cent without the restrictions.
ISRAEL
After the global financial crisis (GFC), house prices grew rapidly as borrowers took advantage of floating interest rates as low as 1.75 per cent.
In May 2011, the floating-rate part of the loan was restricted to one-third of the total.
That was followed by strict LVR caps in late 2012 of 50 per cent for investors and 75 per cent for first-home buyers.
However, Gordon found the earlier move appeared to be more effective.
"Notably, this was the only measure that directly affected the cost faced by borrowers, by forcing them to take out at least two-thirds of their loan at higher fixed-term rates."
SWEDEN
Swedish house prices averaged about 10 per cent growth each year between 2001 and 2007, slowing during the GFC before rebounding again.
In 2010 the banking regulator introduced an 85 per cent LVR cap on new home loans.
"The most visible response was an explosion in unsecured top-up loans, albeit at higher interest rates than for secured loans."
House prices fell slightly in 2011, but have since started to rebound.
Westpac's full report.
- © Fairfax NZ News
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