The Reserve Bank says restricting low-deposit loans is the best option available to cool a rampant Auckland housing market and avoid damaging the banking system.
In a blunt speech on Thursday, Reserve Bank deputy governor Grant Spencer told a business audience in Wellington that the central bank is seriously considering using the tool, rather than raising interest rates.
Mr Spencer said Auckland's overheated housing market could collapse and undermine the financial health of major banks. The central bank can't raise interest rates for fear of damaging the economic recovery.
Mr Spencer said new mortgage approvals and loans had been growing at a faster rate and are now comparable with the peak levels before the global financial crisis in 2008.
The deputy governor said restricting deposits of less than 20% of a loan is the best option to dampen strong housing demand - but warns it is no panacea. He admits first time home buyers might have less access to credit, but says in the longer term it would help to make houses more affordable.
The Reserve Bank is consulting banks about new rules on restrictions, which analysts said could be in place in early September this year.
Mr Spencer said the central bank does not favour exemptions for particular groups. While it could encourage risker loans from non-bank lenders and reduce access to credit, he said the bank is more worried about the financial wreckage that could result from a collapse in the housing boom.
International ratings agency Standard and Poor's views the Reserve Bank's use of such restrictions as a positive development. Director Gavin Gunning said rising house prices are one reason his organisation has a negative outlook on the locally-owned New Zealand banks.
A negative outlook implies a one-in-three chance a bank's credit rating will be lowered.
Mr Gunning said the macro-prudential tools provide regulators in New Zealand with an additional tool to assist property market stress and more generally other stresses that could impact the banking sector.