by Jenny Ruth
It estimates growth in borrowing has slowed from $19 billion a year to below $2 billion now.
About $8 billion of the slowdown is likely due to a range of factors, the central banks says.
"Anecdotal reports from banks indicate that the number of households making principal payments ahead of schedule has increased, with many households using some of the savings from lower interest rates to make these payments," it says.
"If all of the interest savings from lower mortgage rates were being used to make excess mortgage payments, this could explain around half of the unusual decline in credit growth."
Some households may have increased their savings as well as repaying debt or they may have allocated savings away from investmetns towards debt repayment, the Reserve Bank says.
The gradual fall in house prices since 2007 has probably helped reduce credit growth too.
"Before 2007, rapidly rising house prices meant that new buyers had to take on more debt to purchase property from existing owners who had built up large equity positions through capital gains," it says.
"People reselling property bought in recent years are likely to have less equity while, for buyers, banks have tightened up on new lending with very high loan-to-value ratios."
However, the continuing relationship between mortgage approvals and housing transactions "suggests that borrowing behaviour by purchasing households may not have changed materially," the central bank says.
Anecdotal evidence also suggests less active equity withdrawal, or topping up of existing mortgages, over the past few years.
"There is currently no reliable way to gauge how important this has been but it is likely to have been another factor behind weak credit growth."
Another temporary factor is the insurance payouts in Canterbury, estimated at about $3 billion so far, some of which may have been used to reduce outstanding mortgage balances until rebuilding activity starts, the Reserve Bank says.
It doesn't expect credit will resume pre-GFC growth rates and says the outlook for bank profitability will be shaped partly by how banks respond to lower credit demand.
"This response may include a focus on cost containment or increased competition to gain market share for specific banking products and services," the bank says.
It notes banks have relaxed their credit standards over the past six months and banks have been reporting increasing competitive pressures.
Higher levels of capital required by regulation, a response to the GFC aimed at strengthening banks, will also curb bank profitability, the central bank says.
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