Rising Auckland house prices put lenders at risk, RBNZ says

Wednesday 3rd June 2015

Surging Auckland house prices would put New Zealand's lenders at risk if there was a significant downturn, according to the Reserve Bank, which was happy with the lenders' ability to stay within regulatory requirements just six months ago.

The central bank is seeking feedback on plans to impose new macro prudential restrictions on residential property investors' ability to buy highly leveraged housing, which it sees as the biggest risk to the country's financial stability. When the central bank ran stress tests on New Zealand's financial system last year, it found the country's lenders could withstand a significant housing market downturn concentrated in Auckland, with capital ratios falling to within 1 percent of the minimum requirements.

Since the scenarios for the test were finalised early last year, Auckland house prices have climbed 18 percent and the bulk of lending has gone to Auckland, with property investors's share of residential housing purchases increasing.

"The Reserve Bank's assessment is that stress test results would be worse if the exercise was repeated now," it said in a consultation paper issued today on its proposals to impose higher loan to valuation ratios on houses purchased in Auckland.

RBNZ governor Graeme Wheeler last month announced the plans to introduce new restrictions, which will apply from October and require borrowers to have at least a 30 percent deposit.

The bank says property investors rather than home buyers have increased their share of borrowing to about 40 percent of the property market from 35 percent before the first set of loan to value ratio speed limits was imposed in October 2013. At the same time, the RBNZ plans to ease LVR limits outside Auckland, where modest levels of house price inflation are not causing concern.

"While there is a risk that there could be a re-emergence of house price pressures outside of Auckland, it would take a sustained period of strong growth before valuations became as stretched as in Auckland," the paper said.

The Reserve Bank says residential property investment loans have relatively low default rates during normal economic times, but a downturn would bring a rising rate of defaults.

The new measures are expected to cut Auckland house sales by 8 percent in the first year, and reduce price growth by between 2 percent and 4 percent, while increasing sales outside the nation's biggest city by 4 percent, and lift non-Auckland house prices by 1 percent.

The Reserve Bank also confirmed last week that it will press ahead with plans to introduce a new asset class, carving out residential property investors as a sub-set of bank loans, and requiring banks to hold more capital against those loans. The micro prudential initiative is needed to impose the broader restrictions on highly leveraged lending to property investors.

BusinessDesk.co.nz

Comments from our readers

No comments yet