5 Mar 2013

RBNZ eyes remedies for housing bubble

6:55 am on 5 March 2013

The Reserve Bank has set out options for expanding its tool kit to help reduce the risk of a housing bubble emerging that could potentially weaken the whole financial system.

As expected, these include forcing banks to hold more capital during credit booms, increasing capital in response to sector-specific risks, adjusting the amount of retail funds and long term wholesale funding banks must hold, and restricting high loan-to-value mortgage loans.

With a nod to Auckland's robust property market, the bank notes these tools would also help take some of the pressure off the use of interest rates to keep inflation in check, and perhaps the New Zealand dollar.

The discussion document sets out steps the Reserve Bank would follow, including assessing the risk of asset bubbles, whether intervention is needed, which tool is best to handle it, and how it should be applied.

If it does take action, the Reserve Bank says it will be forward-looking, and will not affect existing loans agreements.

The Reserve Bank recognises there are costs associated with the adoption of these tools, including loan to value restrictions hitting new home buyers with little equity hard.

Submissions are due by 10 April, though any changes will be agreed with the Minister of Finance, Bill English