Palmerston North property accountant Shane Storey says investors are sitting on their properties because banks are looking to claim sales proceeds to bring their loans into line with lending restrictions introduced last year.

Lending restrictions may be adding pressure to the housing market as average prices in Manawatū-Whanganui reach a record high, industry insiders say.

And some investors are holding on to properties, instead of selling them, because they don't want to be squeezed by their banks.

Loan-to-value (LVR) restrictions introduced last year were intended to make it harder for investors to buy by requiring them to have at least a 40 per cent deposit.

Reserve Bank figures show a 37 per cent drop in the value of investor mortgages over the year after the restrictions were introduced.

READ MORE:

* Investor borrowing drops by over a third in first year of mortgage restrictions

* Palmerston North housing market on 'tightrope'

* Labour governments have overseen greatest house price inflation data shows

* Nearly 50k price drop in Palmerston North average price gives buyers breathing room

* Palmerston North homes less affordable than ever as prices hit a two decade record

But the flipside is investors with mortgages pre-dating the restrictions are also selling less as banks look to claim the proceeds to get their loans in line with the new restrictions.

The Real Estate Institute of New Zealand put the average Manawatū-Whanganui house price at $290,000 in October, 11.5 per cent higher than at the same time last year.

REINZ Manawatū spokesman Andy Stewart said the critically low supply of houses listed for sale in Palmerston North and Manawatū-Whanganui had been a big factor in the area's rising prices over the past two years – and investors hanging on to their properties for longer was adding to that pressure.

There were fewer homes available for sale in the low-to-mid-price brackets, up to $400,000, but there were still a lot of first-time buyers competing for them in Palmerston North.

Stewart said this was pushing prices up and strong sales figures for houses worth more than $500,000 were further accelerating the rise in median house prices.

The drop in mid-level listings was partly due to investors hanging on to properties they would normally sell, and renting them out for longer, he said.

The restrictions affect even investors wanting to sell properties as some banks use any changes to loans as an opportunity to review equity levels.

"There's a lot of uncertainty involved with just how much the bank is going to ask of you," Storey and Associates property accountant Shane Storey said.

"Because it all depends on your situation, the bank, and the particular bank manager you're dealing with."

For example, one of his clients recently decided they were going to sit on their eight properties. They had been looking to sell one, but their bank informed them if they did, the bank expected them to pay down the mortgages on their remaining properties until they reached the 40 per cent equity the LVR rules now required.

In that case, the bank would have claimed all of the money from the sale, and Storey's client would need to pay them more on top to meet what the bank had asked for.

"It's brutal, and that's what is putting the brakes on everything.

"That's why landlords and investors are not borrowing and not selling, because they can't, not without risking that."

Mortgage Link Manawatū adviser Craig Seton said the restrictions had thrown some spanners in the works for investors.

Most banks wouldn't push for more than the sales price to pay down mortgage equity, but might insist on taking another look at the existing loan, he said.

"Some banks are literally putting them through the application process again to see if they can still afford the level of debt they've taken on already."

Seton said smaller "mum and dad" investors, with one or two properties as a retirement nest egg, could be caught out when they had to sell a house for some reason. Unlike larger investors, they usually couldn't afford to hold on, and might end up having to sell everything.

People could still take steps to improve their situation, he said.

For example, they could get their properties re-valued. Depending on the increase in value, that may get the loan-to-value ratio back in line with the newer requirements, he said.