The Reserve Bank is consulting on ways to tighten mortgage lending, following an update to the agreement between the Government and the Reserve Bank on addressing housing issues.
The move could see a drop in high loan-to-value-ratios and the implementation of debt-to-income restrictions to tackle "financial stability risks".
Finance Minister Grant Robertson said the update to the Memorandum of Understanding (MoU) "to further protect the financial system and support the Government’s housing objectives" should not unduly impact first home buyers.
"This change will ensure that the Reserve Bank has the flexibility to respond to emerging financial stability risks and deploy appropriate tools as required," he said.
Deputy Governor Geoff Bascand said the update to the MoU "adds debt serviceability restrictions to the list of tools available which will enable us to be more targeted in our approach to tackling financial stability risks".
Bascand said they were focussed on making sure borrowers were resilient to future conditions, adding he was particularly concerned about people who had borrowed with high loan-to-value-ratios (LVRs) and high debt-to-income ratios, in the last year.
"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," he said.
"We’ve already made adjustments to LVR restrictions to partially manage this risk, but we haven’t seen a sufficient reduction in risky lending."
The Reserve Bank was consulting on reducing the amount of high LVR lending, proposing to restrict and reduce the amount of people who can access the loans from banks for owner-occupied housing.
Currently 20 per cent are able to get a LVR of 80 per cent, the Reserve Bank wants that down to 10 per cent.
Bascand also wanted to consult in October on bringing in debt-to-income restrictions or interest rate floors "in an effort to provide further comfort that borrowing is sustainable".
"Introducing debt-to-income ratios will take longer, whereas the banking industry has informed us that interest rate floors could be implemented more quickly."
Robertson said it was "sensible for the Reserve Bank to consult on lending rules designed to ensure the stability and soundness of the financial system".
"Under changes introduced earlier this year, the Reserve Bank also has to have regard for the Government’s housing policy to support more sustainable prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers."
1 NEWS reported in June that the Reserve Bank would have more options available after the Finance Minister agreed to allow the central bank to introduce debt serviceability restrictions to its toolkit.
Robertson last November began attempting to get the Reserve Bank to take housing into account in its decisions, in a bid to try and get the market under control.
"Now is the time to consider how the Reserve Bank may contribute to a stable housing market," Robertson said at the time.
In the letter to Reserve Bank Governor, Robertson wrote: "I am concerned that the recent rapid escalation in housing prices, and forecasts for this to continue, are affecting the Government’s ability to meet the economic objective".