New limits on risky house lending would lessen the risk of a severe market downturn and damage to the economy, but it might shut more than 10,000 people out of the housing market, a discussion paper issued by the Reserve Bank says.
It wants to add debt-to-income (DTI) restrictions, which limit the amount people can borrow to a multiple of their income, to its toolkit to control the property market and reduce the risk to banks.
The central bank last week said it would not use such restrictions in the current market but wanted them among its options alongside loan-to-value ratios, which are currently in place.
The RBNZ paper said nationwide more than a quarter of home owners have mortgages that are greater than five times their income, and in Auckland that level is 60 percent.
It has previously said that a debt-to-income ratio of five times or greater made borrowers vulnerable.
"High DTI ratios increase the probability of loan defaults in the event of a sharp rise in interest rates or a negative shock to borrowers' incomes. As a rule, borrowers with high DTIs will have less ability to deal with these events than those who borrow at more moderate DTIs."
It said the knock-on effect could be that they would be forced to sell houses, which might worsen a housing crisis.
Debt-to-income restrictions are in force in some countries, including Britain where borrowers cannot have a loan bigger than 4.5 times their income.
The paper said the DTI limits might stop about 2000 owner-occupiers and 9000 investors a year from buying properties, and while that would be a drag on economic activity, it would be offset by the reduced risk of defaults, and a banking and economic downturn.
The consultation paper can be found on the RBNZ website (PDF, 1.28MB).