Reserve Bank says house prices and dairy debt remain a risk
The "significant risk" of further house price increases and high dairy farm debt are the main headwinds facing the country's otherwise sound financial system, the Reserve Bank says.
Its six-monthly Financial Stability Report, released Wednesday, was labelled a scathing assessment of the Government's response to the housing market by the Labour Party.
Reserve Bank governor Graeme Wheeler said house price increases in Auckland had softened in recent months, while dairy prices had recovered to where the average dairy farm was now expected to be profitable this season.
But Wheeler said both still presented risks to the country.
"House price to income ratios in [Auckland] remain among the highest in the world and prices are continuing to rise rapidly in the rest of the country.
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"There is a significant risk of further upward pressure on house prices so long as the imbalance between housing demand and supply remains."
The Reserve Bank has asked Finance Minister Bill English to add debt to income ratios (DTIs) to its tools for restricting residential lending.
The rules would, if imposed, limit how much households could borrow to a proportion of their income.
"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," Wheeler said.
Labour Finance spokesperson Grant Robertson said the report showed Wheeler was worried about the housing market.
He said the Government was sitting on its hand but the Reserve Bank had put it on watch.
"This report should act as a wake-up call for National, but despite so many wake-up calls on housing the Government remains asleep at the wheel.
"The message from the Reserve Bank is clear: the housing crisis is presenting a risk to the future financial stability."
Reserve Bank deputy governor Grant Spencer said the new restrictions on lending to property investors, which began in October, had increased bank resilience to a downturn in the housing market.
But he said the share of mortgage lending from banks to customers with high DTIs had increased, which could lead to more loan defaults during a downturn.
"The banking system has strong capital and funding buffers and profitability remains high.
"Banks could become more susceptible to increased funding costs and reduced access to funding in the event of heightened financial market volatility."
ASB chief economist Nick Tuffley said the DTI tool was unlikely to be ready until the second half of next year.
"Whether or not the RBNZ uses it from that point will depend on the RBNZ's assessment of housing market risks."
ANZ senior economist Philip Borkin said the ball was in the Government's court as to if and when English gave the RBNZ this ability to restrict lending.
Regarding the dairy sector, Wheeler said while dairy prices had increased, indebtedness had increased because farms had had to borrow to absorb losses over the past two seasons.
This left dairy farms vulnerable to future shocks, he said.
"Some farms remain under pressure and problem loans are likely to continue to increase for a time."
Wheeler said global growth was subdued and financial markets were volatile because of political uncertainty.
The cost of this month's Kaikoura earthquake was still being assessed, but the insurance sector was well positioned.