While welcoming the exemption, the Labour Party criticised Westpac bank's decision yesterday to charge higher interest rates for low-deposit borrowers, claiming the Government had created a ''two-tier home lending market''.
Reserve Bank deputy governor Grant Spencer announced yesterday that the central bank, having consulted the building industry and other banks, would exempt new residential construction loans from the LVR restrictions, which were introduced on October 1.
The LVR sought to keep overall bank mortgage lending to people who had less than a 20% deposit, at 10% of banks' lending portfolios, putting first-home buyers at a further disadvantage.
''While high LVR construction lending is only around 1% of total residential lending, it finances around 12% of residential building activity,'' Mr Spencer said in a statement.
''This exemption means that low deposit lending will fall outside the 10% speed limit if it is financing the construction of a new house or apartment.''
Labour's Housing spokesman Phil Twyford said recent evidence from the Registered Master Builders Federation, that the LVR was putting thousands of new builds at risk, ''blew a hole'' in the Government's policy of trying to increase housing supply.
Warwick Quinn, chief executive of the Registered Master Builders Federation, said he had no doubt it was research from independent consulting company for the building industry, Branz, released late last month, which influenced the policy change.
It showed 5000 new houses, not the previously estimated 3000, could be jeopardised by applying LVRs to new house construction.
''The information the banks keep on how much lending they do on new house construction is not great,'' Mr Quinn said.
Mr Twyford said the Government did not consider the LVR's effect on new builds, the fact it would lock first-home buyers out of the market, nor that it would depress already stagnant house prices in many parts of regional New Zealand.
However, economist Shamubeel Eaqub, of the New Zealand Institute of Economic Research, cautioned that the LVR policy had been weakened and the Reserve Bank was tinkering around the edges of the policy by caving in to the house building sector.
''The more the exemptions, the less effective the policy will be,'' Mr Eaqub said, warning that new houses tended to be more expensive, so people with less equity would be encouraged to build, The New Zealand Herald reported.
Mr Twyford also rounded on Westpac's announcement yesterday of higher interest rates for low-deposit borrowers, which ''confirms the existence of a two-tier home lending market''.
''The easy [cheaper] money goes to the well-off, and property speculators, both foreign and domestic, while first-home buyers, who struggle to get a 20% deposit together, now have to cop higher interest rates,'' Mr Twyford said in a statement.
He said Westpac's home loan repayment calculator showed average Auckland home buyers on the low deposit loans would have to pay more than $200 extra per month than those who could afford a larger deposit.
Jennian Homes director Richard Carver, who has been vocal about the impact on LVR on new builds since its inception, has estimated up to 30% of new building inquiries were affected by the LVR restrictions, amounting to ''thousands'' of homes annually.
''We strongly welcome the Reserve Bank's swift action to exempt new house construction from the LVR regulations, as this will increase the supply of new houses that are desperately needed,'' Mr Carver said.
He said Auckland's housing shortage, alongside Canterbury's rebuild, had given ''a false impression of a blanket improvement'' in new housing consents across the country.
''This has not been the case, with many provincial regions still showing a lag in new consents.
''Removing the LVR restrictions goes a long way to making building new a very attractive proposition and should have a positive flow-on effect for these areas,'' Mr Carver said.
Green Party Co-leader Dr Russel Norman said that since LVR was introduced statistics had indicated there had been a sharp drop in planning for new house building.
''A more flexible and smarter approach to LVRs will help to dampen the housing bubble without choking off new home building,'' Dr Norman said in a statement.
However, the LVR exemption was not a full solution and the Greens wanted to see a government-led programme of affordable house-building and progressive ownership, to give families a pathway to owning their own home.
''The Green Party also want to see more flexibility for first-home buyers. The evidence so far is that LVRs are locking young families out of the housing market but having little effect on wealthier investors - the opposite of what's needed,'' Dr Norman said.
''LVRs can work, but they need more to be more sophisticated than the Reserve Bank's initial `one-size-fits-all' approach,'' he said.
