New Zealand banks have expressed concern over the Reserve Bank of New Zealand's decision to increase capital requirements for its four biggest banks for those mortgages with high loan-to-valuation ratios.However, the New Zealand Bankers Association said it wasn't clear that a capital overlay for high LVR lending would constrain house price inflation, which, it said, was focused on just Auckland and Christchurch, and was supply-driven rather than demand-driven."The answer lies in increasing supply in those two areas," said NZBA chief executive Kirk Hope. Economists said the changes would have only a small immediate effect on interest rates for high LVR loans, and would be competed away quickly as banks outside the Big Four were free to offer better rates.The RBNZ has estimated that the capital changes would increase rates for high LVR loans by around 20 to 30 basis points, and, potentially, increase rates across the portfolio by four to six basis points, depending on how the banks applied the increased cost of capital.Westpac senior economist Michael Gordon said he did not expect a major impact on the housing market."Competitive pressures will limit the extent to which higher funding costs can be passed through to mortgage rates," Gordon said."The impact on lending rates is proportionately small - probably less than a single incremental change in the official cash rate. And, if the price of loans doesn't change significantly, we shouldn't expect a significant change in the behaviour of borrowers and lenders, and, therefore, in the housing market," Gordon said.The biggest impact would be on high LVR loans, which make up around 30 per cent of new lending."It's apparent that this restriction is much more effective at making banks safer during a downturn than at leaning against the housing cycle," Gordon said.