As a result, first home buyers in Wairarapa would be restricted from getting a foot on the property ladder.
"If they want to do it, do it regionally, do it in Auckland and do it in Christchurch, but don't do it in the rest of the country."
Currently, home loan customers who meet credit criteria can be lent up to 100 per cent of a home's value.
About 20 per cent of the nation's $180 billion in residential mortgages are written at loan-to-value ratios of more than 80 per cent, and 10 per cent above 90 per cent. The restrictions are aimed at increasing the resilience of the banking system, by increasing the average amount of collateral held against housing loans.
Last week Westpac Bank revealed it was pulling back on its low-equity, high-risk mortgage lending.
However, REINZ chief executive Helen O'Sullivan said outside of Auckland and Christchurch, house price increases had been "very modest".
The Reserve Bank's final decision on the proposals would need to take into account that housing was a regional issue, she said.
The proposal did not address the fact that lack of supply was one of the big drivers of price increases.
"While restraining credit might reduce demand, it doesn't get rid of the over-riding issue, which is that people need houses to live in."
First home buyers would be unfairly targeted by a blanket policy, Ms O'Sullivan said.
"It would have a disproportionate impact on that group and I don't really think it's first home buyers that are driving price inflation."
House hunters would be forced to do whatever they could to pull money together for a mortgage deposit, borrowing money from family, friends and other, less reputable, lenders, she warned.
New Zealand Bankers Association chief executive Kirk Hope said he did not favour LVR restrictions.
The biggest impact on house prices in Auckland and Christchurch was not an availability of credit but supply limits, Mr Hope said. APNZ
