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In a speech released today, deputy governor Grant Spencer said pressures in the housing market were easing gradually.
"The volume of house sales has dropped considerably across the country, other than in Canterbury, and the slowdown in volume has also been reflected in prices."
The Reserve Bank introduced loan to value restrictions (LVR) on banks in October last year limiting the lending to those with less than a 20 per cent deposit to 10 per cent of new lending.
Spencer said without those restrictions annual house price inflation might be 2.5 per cent higher.
Housing supply conditions had also started to improve and in Auckland progress was being made in freeing up the supply of buildable land and improving the consent process.
The Government announced another round of land in Auckland to be targeted for building houses on this week.
Spencer said the Reserve Bank believed the lending restrictions were achieving their purpose.
"The financial system is less vulnerable to an adverse housing shock and banks are now less exposed to potential credit losses as the interest rate cycle turns upwards."
At this stage he said the earliest date for beginning to remove them was likely to be late in the year. But warned that before it removed the restrictions the bank wanted to be confident that the housing market was responding to interest rate increases and that immigration pressures would not cause a resurgence of house price pressures.
Dominick Stephens, chief economist for Westpac, said it had been speculating on the future of the loan restrictions and today's speech had given a very direct answer to questions about the limits.
Stephens said it was possible the timetable for restrictions could change if the housing market took off again.
"But in our view that is unlikely to happen, with interest rates rising as they are."
Stephens said Spencer's speech also indicated the Reserve Bank was looking at a less steep increase in the official cash rate than it had indicated in March due to the high exchange rate.
Spencer said floating mortgages could be 7 to 8 per cent in two years' time, closer to their average of the past 20 years.
Some economists had predicted floating rates would be that high by the end of this year.
Spencer said the extent and timing of interest rate increases would depend on a number of uncertain variables, in particular the exchange rate and housing market pressures.
- Tamsyn Parker of the New Zealand Herald