Wednesday 11 May 2016 09:27 AM
RBNZ assessing whether further home loan restrictions needed, says Auckland prices are 'stretched'
By Jonathan Underhill
May 11 (BusinessDesk) - The Reserve Bank is considering whether to impose further home-loan restrictions amid signs that price pressures are re-emerging, especially in Auckland where prices "remain stretched".
Governor Graeme Wheeler stopped short of announcing any specific new measures in the six-monthly Financial Stability Report released today but said the central bank is "closely monitoring developments to assess whether further financial policy measures would be appropriate".
“Imbalances in the housing market are increasing with house price inflation lifting again in Auckland, after cooling in late 2015 and early 2016 following new restrictions in investor loan-to-value ratios and government measures introduced in October,” Wheeler said. “The bank remains concerned that a future sharp slowdown could challenge financial stability given the large exposure of the banking system to the Auckland housing market.”
The New Zealand dollar rose to 67.93 US cents after the report was released, from 67.60 cents immediately before because there had been speculation Wheeler would impose further measures to cool the housing market, clearing an impediment to him cutting the official cash rate as soon as next month.
The amount of high loan-to-value ratio home lending by banks has tumbled since the Reserve Bank in October 2013 imposed a 10 percent speed limit on lenders writing residential mortgages with a deposit of less than 20 percent. It added Auckland-specific restrictions last November. Banking mortgage lending at LVRs above 80 percent were at 25 percent of total home lending in September 2013, before the first restrictions were imposed. In March this year those loans had fallen to 7.9 percent of the total, Reserve Bank figures show.
The stability report said New Zealand's financial system "remains resilient and continues to perform is functions effectively".
"Bank capital and liquidity buffers are strong relative to current regulatory minimums," Wheeler said today. "Despite a modest increase in loan loss provisioning in recent quarters, bank profitability remains close to post-crisis highs. However, risks to the financial stability outlook have increased in the past six months."
Those risks included a deteriorating global economy that had led to an increase in financial market volatility, a challenging outlook for the Chinese economy, low growth in Europe and widening credit spreads which have placed "upward pressure on the cost of funds for New Zealand banks."
Dairy product prices remain low and many farmers "now face a third season of negative cash flow with heavy demand for working capital." As a result, "problem loan levels are expected to increase significantly over the coming year, although losses in the banking sector are likely to be absorbed mainly with profits," the report said.