Auckland housing market still at risk of correction, Reserve Bank says
House price inflation in Auckland has softened in recent months but the market is still at risk of a "significant" correction, the Reserve Bank says in its six-monthly financial stability report.
The central bank said it was uncertain whether softer house price inflation would be sustained and noted that in the Auckland region house price-to-income ratios "remain among the highest in the world" and prices are continuing to rise rapidly in the rest of the country.
"There is a significant risk of further upward pressure on house prices so long as the imbalance between housing demand and supply remains," the bank said in a statement.
Deputy governor Grant Spencer confirmed the bank has requested Finance Minister Bill English approve the addition of a debt-to-income (DTI) tool to its suite of restrictions on lending to the property market, saying while it has no immediate plans to impose the measure, "financial stability risks can build up quickly and restrictions on high-DTI lending could be warranted if housing market imbalances were to deteriorate further."
"New restrictions on lending to property investors with high loan-to-value ratios (LVRs) came into force on October 1," Mr Spencer said. "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."
New Zealand would join Ireland, the UK, Canada and Hong Kong in adopting a DTI limit. A macro-prudential DTI policy "would enable the Reserve Bank to limit the degree to which banks can reduce mortgage lending standards during periods of rising housing market risks, in order to protect financial system soundness," it said.
The stability report concluded that New Zealand's financial system is sound "but continues to face risks." It noted the recovery in dairy prices in recent months to levels that should allow the average dairy farm to return to profitability this season but said indebtedness in the sector had increased, "leaving the sector vulnerable to future shocks" and problem loans "are likely to continue to increase for a time."
The Reserve Bank is still assessing the impact of the Kaikoura earthquake and said it was too early to assess the cost to insurers, although the sector was "well positioned in terms of catastrophe reinsurance cover and capital buffers."
New Zealand's banking system has strong capital and funding buffers and profitability remains high, it said.
"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," the bank said. "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."