Property investors in super-heating Auckland housing market will have to have a deposit of 30 per cent under new lending rules announced by the Reserve Bank.
The central bank announced the policy on Wednesday when it released its six-monthly Financial Stability Report.
"We don't use words like bubble. You won't hear the bank talking about rock star economy or things like that," Reserve Bank of New Zealand governor Graeme Wheeler said.
But property prices in the Auckland region have become very stretched, increasing the risk of financial instability from a sharp correction in prices, he said.
The RBNZ will introduce a new asset class from October 1 covering property investors, defined as any mortgage secured on a home that is not an occupied by its owner.
The bank had been in talks with private lenders to agree on a definition, which would then require lenders to hold more capital against those loans, Mr Wheeler said.
To recognise more subdued housing markets outside Auckland, the Reserve Bank will ease the restrictions on high-LVR lending for all residential lending to 15 per cent from the existing 10 per cent. The 10 per cent speed limit will stay in place for Auckland owner-occupiers.
The new restrictions on Auckland lending won't apply to mortgages to build new houses or apartments.
Mr Wheeler said New Zealand's financial system is sound and operating effectively, but faces significant risks.
Auckland's median house price is 60 per cent above its 2008 level, and house prices in Auckland have been rising rapidly since late last year.
This reflects ongoing supply constraints and increased demand, driven by record net immigration, low interest rates and increasing investor activity.
A second area of risk for the financial system relates to the dairy sector. Many highly leveraged farms are facing negative cash-flows, and the risks will become more pronounced if low milk prices persist beyond the current season.
The third key risk arises from the current very easy global financial conditions. Low interest rates are encouraging investors into riskier assets in the search for yield.
Prices of both financial and real assets are becoming overextended in many markets.
The Reserve Bank will issue a consultation paper later this month seeking feedback on the new proposals.
CHANGES
* Residential property investors in the Auckland Council area using bank loans need a deposit of at least 30 per cent
* Restrictions on banks for high LVR borrowing outside of Auckland eased from 10 to 15 per cent, to reflect the more subdued housing market conditions outside of Auckland
* Retain the existing 10 per cent speed limit for loans to owner-occupiers in Auckland at LVRs of greater than 80 per cent
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