Standard and Poor's warns against NZ property market over-heating

Thursday 28th February 2013

New Zealand's banking system is at risk from property prices overheating if the country's exports stop being worth so much or the kiwi dollar falls out of bed, says the international credit rating agency, Standard & Poor's.

S&P issued a report on the New Zealand banking sector saying "significant risk remains of a sharp correction in property prices."

The rating agency, which assesses country and business credit-worthiness, noted the recent jump in Auckland and Christchurch property prices and suggested New Zealand is still vulnerable because of the run-ups in value seen in the mid-2000's, before the global financial crisis, let alone the latest appreciations.

On balance, S&P thinks these risks are unlikely to be borne out, saying "we expect that strong asset quality ratios are likely to be maintained at levels supportive of banks' current ratings, on the back of a benign economic outlook and stable property prices."

It also predicts that property prices won't rise much from where they are now, even if the New Zealand economy stays on an even keel.

"Our base case scenario sees real estate prices continuing to stabilise at current levels over the medium term, and such an occurrence having a stabilising effect on asset-quality ratios."

In part, that outcome will depend on the state of the world economy, S&P says. With New Zealand banks funding about 37 percent of their lending from sources offshore, the country remains vulnerable should global financial markets seize up in another crisis.

However, S&P warns about a scenario where the world economy strikes trouble and the New Zealand dollar, along with export prices, falls sharply.

"In our view, such a scenario, in conjunction with a rise in unemployment, could increase the risk of a significant in banks' credit losses on the back of a build-up in housing prices and domestic credit over the period that preceded the global financial crisis."

Such a turn of events "would have a material impact on the financial strength of the balance sheets of New Zealand banks", although the four largest banks are all subsidiaries of Australian banks and retain their owners' AA-minus credit ratings.

New Zealand-owned Kiwibank is rated A+, while The Co-operative Bank and Heartland Bank carry BBB-minus rates., TSB Bank is slightly stronger, with a BBB-plus rating.

S&P's assessment comes at a time of growing government concern about a pick-up in residential housing prices, which is worsening New Zealand's housing affordability problem.

Finance Minister Bill English used a speech yesterday to outline the government's desire to see the Reserve Bank of New Zealand use new macro-prudential tools to control banks' lending and capital adequacy ratios.

BusinessDesk.co.nz

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