The Reserve Bank is likely to go ahead with its plans to introduce limits on loans to first home buyers, Prime Minister John Key says.

Talking to reporters following a speech to Local Government New Zealand, Key said his guess was that the central bank would bring in loan-to-value ratios (LVRs) on bank lending. That would effectively ration mortgage borrowing by those with small deposits, including many first-time buyers.

The bank's other options were more restricted; to raise interest rates (presently 2.5 per cent and not expected to rise until late this year of early 2014) or raise them more rapidly than they would otherwise.



"We are continuing to work on that, let's see how that works out,'' Key said.



He repeated his priority was first home buyers but that the Government needed to ensure the overall housing market was stable and didn't present risks for current home owners or new buyers whether they were first home buyers or not.



"If we continued to leave the housing market completely unchecked in Auckland and it continued to go up at the rate it's going up then eventually that would be a bubble that would have to burst. And you would leave a lot of potentially first home buyers with very large loans and an over-valued property and effectively negative equity where they owe more than the property's actually worth," Key said



"We need to try and help people into their homes but also facilitate an orderly market."



He said the biggest thing the Government could do was on the supply side. In Auckland there were simply not enough houses and that's why the Government had worked with the council on the housing accord.

Labour leader David Shearer said Key must be "kidding" with his claim first home buyers were his priority.



"The dream of home ownership is already beyond the reach of hundreds of thousands of Kiwis and when the Reserve bank introduces limits on high LVR lending things will only get worse."



He said the Government gave the bank the power to use LVRs knowing it would add $50,000 to $60,000 to the deposit for an average Auckland house.



Shearer said Labour would protect first home buyers with an interim exemption from LVRs until the "rampant housing market is brought under control".



Labour has promised to build 100,000 affordable homes over 10 years an on-sell them to first time buyers. It also plans to introduce a capital gains tax, excluding the family home, to take the heat out of property speculation.

Earlier in his speech, Key said the Government was keen to see all New Zealanders have the opportunity to buy a house, Prime Minister John Key says.



But he gave no details of any Government response if the Reserve Bank imposes LVRs.



Ministers have signalled that changes could include widening access to KiwiSaver contributions and subsidies, as well as boosting the government-guaranteed Welcome Home Loan scheme that is exempt from LVR calculations.



"I have made my thoughts clear - first-home buyers are a priority for the Government. That remains my view," Key said.



It was not in the interests of first-home buyers if rapidly increasing house prices forced the central bank to lift interest rates.



"Even with LVRs introduced, interest rates may ultimately rise anyway, but the intention with these loan-to-value ratios is to provide the Reserve Bank with other tools to dampen demand," he said.



Housing bubbles overseas, such as in the United States, had a negative impact on the economy and left many homeowners and banks exposed.



"So it's an issue that has to be taken seriously here," he said.



"If it is left unchecked, some buyers could find themselves substantially overexposed in an overvalued market, and we all know what happens if those values start to fall."



Key said the demand side of the equation was largely the responsibility of the independent Reserve Bank . "They will in the end have to make a decision."



Part of the mix for the Government was ensuring economic fundamentals were right, people could get a job and there was enough land supply.



Affordable interest rates were also part of the mix.



"So this is a debate about getting the balance right between ensuring people have the opportunity to buy a home and ensuring we don't have problems with the banking system, with all the negative economic impacts that would entail," he said.