Comments from Finance Minister Bill English suggest the tools will be signed off in the middle of the year, the loan-to-value (LVR) limits and adjustments to the core funding ratio of banks being the most likely to be used if the central bank acts later this year to lean against the housing market.
Definition
Loan-to-value ratios (LVR)Directly target the housing market by restricting loan demand. They can be put into effect quickly but are likely to have the most impact on low-income and first-home buyers, who tend to have higher LVR mortgages.
Imposing LVR limits can help moderate the credit cycle if high LVR lending is a key driver of the credit boom. They limit the extent to which banks loosen credit standards and potentially restrict loan demand.
The New Zealand dollar spiked again on Thursday after Reserve Bank governor Graeme Wheeler kept the official cash rate unchanged at 2.5%, where it is expected to remain until at least the end of the year. Domestically, the economic recovery was uneven, he said. While demand and output were expanding, the labour market remained weak. Economic growth and inflation were being shaped by a range of forces.
''House-price inflation is increasing and the bank does not want to see financial stability or inflation risks accentuated by housing demand getting too far ahead of supply,'' Mr Wheeler said.
Mr Timms said if the Auckland and Christchurch housing markets were taken out of the equation, Mr Wheeler had a ''clear mandate'' for cutting the OCR.
''We need something like 30% LVR limits in Auckland and maybe 10% to 5% in Dunedin. That might make people think about moving to Dunedin or other centres. If the bank was able to regionalise its LVR, it would take pressure off housing inflation generally and Mr Wheeler can address the effects of the drought without causing a housing boom.''
Mr Timms recognised that a regionalised LVR would probably cause ''outrage'' in Auckland and Christchurch, but the health of the wider economy was at stake.
''We have a drought across the whole North Island and that will affect us as a food producer. A regionalised LVR will make life easier for the bank.''
Retail banks would not be happy with the plan, but perhaps they could lend to small businesses and help generate economic growth, Mr Timms said.
ASB chief economist Nick Tuffley said the issue would be how effectively the Reserve Bank could oversee a regionalised policy.
''It would require a lot of vetting by the Reserve Bank to ensure the mortgages were being written within the rules of those areas.''
Also, there would be arguments over how effective the regionalised policy was, given the high level of compliance, he said.
The key advantage of adjusting the LVR limit was it directly targeted housing and could be put into effect quickly. The Reserve Bank was considering a two-week notice period.
However, LVR limits were likely to have the most impact on low-income and first-home buyers, who tended to have higher LVR mortgages.
Overseas experience suggested LVR restrictions led investors to move down the house price scale, creating more competition at the lower end of the market.
''These impacts raise issues surrounding social equity, unless there is some form of workable exemption for a `socially desirable borrower' class.''
Small businesses that used personal housing as security for business loans could also be adversely affected.
''There is huge scope for borrowers to get around LVR restrictions by sourcing the remaining funding elsewhere.''
The core funding ratio was introduced as part of the central bank's new prudential liquidity policy in April 2010. At its introduction, banks were required to fund a minimum of 65% of their lending from ''core funding sources'', which was wholesale debt that had maturity of greater than one year. The ratio was increased to 70% in mid-2011 and then to 75% at the beginning of this year.
