WELLINGTON, New Zealand (AP) -- New Zealand's central bank on Tuesday 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 isn't 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. But raising interest rates also has a broader effect of slowing growth, something that's 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's because a high dollar tends to hurt the country's vital dairy and tourism industries.
Wheeler said in a speech Tuesday at Otago University that the Reserve Bank is concerned about the rate at which house prices are increasing and the risks that poses to the financial system and the economy. He 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.
"Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future," he said. "This is particularly the case in a market that is already widely considered to be overvalued."
New Zealand house prices dipped only modestly after the 2008 global financial crisis and have recently reached all-time highs.