Financial System Still Facing Housing Risks: Reserve Bank

The Reserve Bank today released its November Financial Stability Report sending a clear message that although the country’s financial system remains sound, it continues to face risks. Governor Graeme Wheeler said as long as there is still an imbalance between demand and supply “there is a significant risk of further upward pressure on house prices”. “House price inflation in Auckland has softened in recent months but it is uncertain whether this will be sustained. “House price to income ratios in the region remain among the highest in the world and prices are continuing to rise rapidly in the rest of the country." Wheeler said the Reserve Bank has asked the Minister of Finance to agree to the addition of a Debt to Income (DTI) tool to the Memorandum of Understanding on macro-prudential policy. “While the Bank is not proposing use of such a tool at this time, financial stability risks can build up quickly and restrictions on high-DTI lending could be warranted if housing market imbalances were to deteriorate further.” Deputy Governor, Grant Spencer, said, “New restrictions on lending to property investors with high loan to value ratios (LVRs) came into force on 1 October. These restrictions, along with the earlier LVR restrictions, are increasing the resilience of bank balance sheets to a downturn in the housing market. “However, the share of bank mortgage lending to customers with high DTI ratios has been increasing and this could increase the rate of loan defaults during a housing downturn. “The banking system has strong capital and funding buffers and profitability remains high. Despite being relatively concentrated, New Zealand’s banking system also appears to be operating efficiently from an international perspective based on metrics such as the cost-to-income ratio and the spread between lending and deposit rates. “However, the banking system’s reliance on offshore wholesale funding is beginning to increase due to a widening gap between credit and deposit growth. Banks could become more susceptible to increased funding costs and reduced access to funding in the event of heightened financial market volatility. In an interview with TVNZ, Finance Minister Bill English was asked if he would be handing the Reserve Bank more tools to cool the housing market. “Well, let’s see what happens, but I’d say that the fact that Reserve Bank’s cut and it hadn’t passed through to lower interest rates is a pretty clear signal to borrowers and households we’re on an interest rate floor at the very least,” English said. “And when they see rates rising, that does have an impact. Even if you know that they’re going to rise sometime, it’s still different when it actually happens and they’ll be recalculating what their debt servicing is going to be, and I think it’ll make our housing market a bit more sensible.”

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