Propertyscouts Hawkes Bay

Reserve Bank signalling 40% deposits for investors! - 19th Jul 2016

The Reserve Bank is proposing tight new rules on property investors, requiring banks to lend only a sliver of their loans to those with less than a 40 per cent deposit.

The central bank has released a paper suggesting only 5 per cent of lending to residential property investors could be to borrowers with less than a 40 per cent deposit.

Under the Reserve Bank's proposals, the new rules would be in place from September, which ASB said marked a "relatively swift implementation" date.

Governor Graeme Wheeler's proposals would also retain a requirement that only 10 per cent of lending could be to borrowers with a deposit of less than 20 per cent.

"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 recognise the higher risks associated with such lending."

Loans for the construction of new property would continue to be exempt from the restrictions.

Figures from QV released earlier in July showed average house prices across New Zealand rose by more than 13 per cent in 12 months, with gains spreading far beyond Auckland.

ASB chief economist Nick Tuffley said the move from the Reserve Bank came earlier than expected.

"The [Reserve Bank] is acting with a degree of haste that seemed lacking in recent public statements – we had expected further measures, just not quite this soon," Tuffley said.

The New Zealand dollar dropped on the news, falling about US0.6c to US70.5c, a three week low. The kiwi was also down against the Australian dollar and the British pound on Tuesday morning.

The announcement, which comes two days ahead of the Reserve Bank's hastily arranged economic update, appears to bolster the odds that the central bank will cut the official cash rate on August 11.

Financial markets increased bets that Wheeler would cut the OCR to a new record low of 2 per cent in August in the wake of lower than expected inflation figures for the June quarter, released on Monday.

Westpac acting chief economist Michael Gordon, who was already tipping that Wheeler would cut before the inflation figures, said Wheeler's announcement should come close to settling the argument.

"If anyone in the market [still] needed convincing, I think today's statement and the hastily scheduled economic update on Thursday [should do it]; I can't imagine that [the Reserve Bank] would arrange something like that to say they were fine with the market not pricing [interest rate] cuts."

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