New Zealand’s central bank yesterday announced it will impose restrictions on mortgage lending, hoping to restrain increases in house prices without derailing economic growth.
Most borrowers will need to cough up a 20 percent deposit to qualify for a mortgage under the changes announced by Reserve Bank of New Zealand Governor Graeme Wheeler.
From Oct. 1, only one in every 10 new home loans will be allowed to exceed 80 percent of the property’s value. The quota will be calculated on the dollar value of the loans.
The approach marks a first for New Zealand, but the country is not the only one taking such measures to try and cool its housing market. Canada, Israel and South Korea have also tried similar approaches, so far with mixed results.
Central banks in developed countries typically raise interest rates to dampen house price inflation. However, raising interest rates also has a broader effect of slowing growth, something that is not desirable for many countries right now that are trying to recover from the global financial crisis and recession.
New Zealand’s dollar is already high by historic measures and any increase in interest rates would likely force it higher, something the Reserve Bank wants to avoid. That is because a high dollar tends to hurt the country’s vital dairy and tourism industries.
New Zealand house prices dipped only modestly after the 2008 global financial crisis and have recently reached all-time highs. Wheeler said New Zealand home prices were high by international standards when compared with incomes and rents. He said the country’s household debt levels are also high.
Meanwhile, New Zealand will partially privatize its largest electricity generator in early November as part of the government’s plan to balance the books by 2014-2015, New Zealand Prime Minister John Key said yesterday.
Key said the government would float 49 percent of Meridian Energy and retain a majority 51 percent, similar to its sale of Mighty River Power, which poured NZ$1.7 billion (US$1.36 billion) into Treasury coffers when it was partially listed in May.
Key, whose conservative administration has committed to achieving a budget surplus in the 2014-2015 financial year, said the Mighty River sale had been a success and he expected the same with Meridian.
“[They] benefit from a broader shareholder base, and end up being better, stronger companies for the rigour and transparency that being listed on the share market brings,” he said.
The government’s long-term plan, announced two years ago, is to raise NZ$5 billion to NZ$7 billion by selling 49 percent stakes in Mighty River, Meridian and Genesis Energy, while also reducing its holding in flag carrier Air New Zealand from 76 to 51 percent.
State-owned coal producer Solid Energy was also part of the initial sale plan, but has been withdrawn as it struggles to cope with weak global prices.
Key said that after November’s Meridian float, Genesis would follow early next year.