Westpac economists are encouraged to hear the Reserve Bank talking about an exit strategy from the limits on high loan-to-value lending and say this country could become an "exception" by removing them.
RBNZ Deputy Governor Grant Spencer strongly hinted last week that the central bank would look at removing the limits, introduced in October last year, as it raised interest rates to more "normal" levels.
The RBNZ lifted the Official Cash Rate to 2.75% from 2.5% earlier this month and is expected to continue lifting rates through this year and next year.
In their weekly commentary the Westpac economists said that "if the RBNZ’s current rhetoric is to be believed" New Zealand could become an "exception" by removing the LVR limits, as there were "ominously few examples from overseas of similar restrictions ever being removed".
"We expect the housing market to slow substantially under the weight of rising interest rates, which will remain necessary because of the booming construction and primary export sectors. In such a scenario, the rationale for LVR restrictions might well disappear," they said.
The economists said there were "hints" in Spencer's speech last week that the LVR restrictions have had a bigger impact to date than the RBNZ was anticipating.
"The RBNZ’s latest estimates put the impact of LVR restrictions as equivalent to a 25-50 basis point increase in the OCR, which is a touch stronger than the Bank’s initial assessment," they said.
"One reason for the larger than expected impact might be because banks have been even more conservative on lending than the RBNZ rules require."
The limit's been set at 10%, or effectively about 15% if all exempted lending is included.
The economists said while some degree of caution by banks was understandable, given that there could be harsh penalties if banks breached the rules, the extent of the pullback in low-equity lending might have been greater than the central bank had anticipated.
"This has raised the possibility, in our minds, that if high-LVR lending remains low the RBNZ might consider relaxing the restrictions so the portion of low-LVR lending is closer to what was originally intended."