The Reserve Bank of New Zealand is proposing to remove loan-to-valuation restrictions on mortgage lending as Covid-19 wreaks havoc on the economy.

"This move will help banks to keep lending to support customers, including with mortgage deferral," the central bank said.

The LVRs, which went through several adjustments, were first introduced in October 2013 to curb an overheated housing market.

There are currently two loan-to-value restrictions in place: banks can only lend 20 per cent of their residential mortgage book to owner-occupiers who don't have at least a 20 per cent deposit and they can only lend 5 per cent to investors who don't have a 30 per cent deposit.

Stephen Toplis, head of research for BNZ Bank, said New Zealand house prices are in for a 10 per cent hit over the remainder of the year due to Covid-19.

"The single biggest determinant of whether people purchase a house is what they earn. In turn, this is most affected by whether or not they have a job," he said. Toplis is expecting the unemployment rate to hit 8 per cent by the end of the third quarter.

"The weakening labour market will be the biggest driver, but we also see reduced demand due to lower-than-expected population growth, and increased supply, as properties that were previously rented out to tourists come to market," he said.

The proposal is in response to the economic downturn caused by the Covid-19 pandemic.

The LVR requirements are one of the macro-prudential tools that the Reserve Bank has available to respond to cyclical pressures, said RBNZ deputy governor Geoff Bascand.

"Adjusting the use and calibration of macro-prudential tools in response to economic conditions is how they are intended to be used," he said.

The consultation will be open for seven days. Feedback will then be collated and a decision will be made promptly after that, it said.

Not only that, but, if the restrictions are removed, the RBNZ will monitor activity and feedback from the retail banks for 12 months. After that period, it will review whether to reinstate the restrictions.

"This provides banks and customers certainty that no further changes to LVR requirements will be made for at least one year," it said.

- Business Desk