Mortgage lending rules are to be toughened after the government has given the Reserve Bank approval to tighten loan-to-value ratios and move to bring in debt-to-income ratios.
In a statement, Finance Minister Grant Robertson said the central bank would start consulting reducing low deposit lending by banks to no more than 10 percent of their total lending from the current 20 percent. The measure would come into force on 1 October.
The government has also given RBNZ approval for debt-to-income ratios or interest rate floors, to ensure borrowers can afford to service mortgages.
"This change will ensure that the Reserve Bank has the flexibility to respond to emerging financial stability risks and deploy appropriate tools as required," Robertson said.
He said debt-to-income ratios would be designed to minimise any negative effect on first home buyers, with consultation starting in October.
The moves followed changes made at the start of the year to cool the housing market, which have proved largely ineffective in slowing the 20 percent annual growth in house prices.
RBNZ deputy governor Geoff Bascand said the further restrictions were needed to ensure the financial system was strong, and borrowers able to cope with any economic and financial pressures such as rising interest rates.
"We've already made adjustments to Loan-to-Value Ratio (LVR) restrictions to partially manage this risk, but we haven't seen a sufficient reduction in risky lending."
"If house prices were to fall, some buyers could face the possibility of negative equity - which means the value of their property is below the outstanding balance on their mortgage," Bascand said.
The RBNZ will consult on the DTIs and interest rate floors from October, a process it said would take at least three months.
Robertson said the aim of the previous and new moves has been to improve the affordability for first-home buyers. Earlier moves have been aimed at property investors.
Robertson said they had also clarified in the memorandum that the bank would need to avoid negative impacts on first-home buyers where possible.
"I believe this agreed wording will set clear public expectations while maintaining the operational independence of the Reserve Bank. It is still up to the Reserve Bank how it chooses to introduce any restrictions, having had regard to this condition," Robertson said.
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