From 1 October, banks will be required to restrict new residential mortgage lending at loan-to-value ratios (LVRs) of over 80 percent to no more than 10 percent of the dollar value of their new housing lending flows.

In a recent speech at Otago University, Reserve Bank Governor Graeme Wheeler said:

The Reserve Bank is concerned about the rate at which house prices are increasing and the potential risks this poses to the financial system and the broader economy. Rapidly increasing house prices increase the likelihood and the potential impact of a significant fall in house prices at some point in the future. This is particularly the case in a market that is already widely considered to be over-valued.

The Reserve Bank is not alone in expressing these concerns. Over the past several months the IMF, OECD, and the three major international rating agencies have pointed to the economic and financial stability risks associated with New Zealand's inflated housing market.

The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.

Mr Wheeler has indicated that how long the restrictions will remain in place depends on the effectiveness of the measures in restraining the growth in housing lending and house price inflation. If there is evidence of a better balance in the housing market and the Reserve Bank is confident that their removal would not lead to a resurgence of housing credit and demand, they could be removed.