From September most loans to property investors across New Zealand will require a deposit of 40 percent.Under the proposed changes:
The Reserve Bank (RBNZ) says it wants to make the changes to reduce the risks to financial stability arising from the property boom.
RBNZ Governor Graeme Wheeler says "The banking system is heavily exposed to the property market with residential mortgages making up 55 percent of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength. The proposed restrictions recognise the higher risks associated with such lending
"The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy. Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority."
The Property Institute says the Reserve Bank's move to impose loan-to-value ratios on property investors is a "politically motivated" response to increasing house prices.
From September 1 most loans to property investors across New Zealand will require a deposit of 40 percent. Those with a deposit of less than 40 percent will be limited to 5 percent of a bank's total loans.
Chief executive Ashley Church says the Government must consider removing the Bank's ability to influence house prices.
"If the Reserve Bank can now be politically influenced it calls into question the entire basis of its existence and the terms of the Reserve Bank Act.
"This is essentially a U-turn. Two weeks ago we were told that these measures would be introduced 'at the end of the year'. Now they're suddenly sufficiently serious that they need to be introduced in six weeks' time? What's changed?"
Mr Church says the announcement is directionless and smacks of political expediency.
"There was a time when the Reserve Bank could be trusted to act above politics, in the best interests of the nation. If that's no longer the case - perhaps the Government should consider withdrawing some of the powers it has given the Bank or even reviewing the Act."
He also believes the restrictions will make little difference to house price inflation, calling it "little more than a slight speed bump" for investors.
Opposition parties are praising the Reserve Bank for making it more difficult for investors to buy houses - a move also backed by the Prime Minister.
John Key agrees the change will have a small but significant influence on the housing market.
"The Reserve Bank made the right decision, its one small part of solving the issue.
"The balancing act, which I think the Reserve Bank has got about right, is that it doesn't want to take investors completely out of the market because they buy properties that people then rent."
But NZ First leader Winston Peters doesn't think the bank's moves will make much difference.
"It ignores the two great drivers - high immigration and offshore buying," he said.
"The fact is offshore investors are not being provisioned by New Zealand-based banks - they will carry on as usual while New Zealand investors will simply have to stump up a greater deposit."
Labour and the Greens are also criticising the Government for not taking on the responsibility.
Green Party finance spokesperson Julie Anne Genter says the Government's lack of action forced the Reserve Bank's hand.
"The Government is still the property speculator's best friend - it has made it easier to buy a third, fourth or fifth house than your first,"
"The Green Party supports the Reserve Bank's actions - its way overdue for the Government to show the same leadership," she says.
Labour's finance spokesman, Grant Robertson, says the Reserve Bank has shown it is prepared to do its bit.
"This is the right thing to do... the Bank clearly recognises we are in a housing crisis that is a threat to financial stability,"
But he says National should do more.
"The housing crisis requires more affordable homes to be built, and it requires the Government to be a partner in that."
The Greens want a capital gains tax on property deals, while Labour would ban offshore speculators from buying houses and end tax breaks for landlords.